Tax Tip of the Week | No. 405 | Items to Note on 529 Plans

Tax Tip of the Week | May 3, 2017 | No. 405 | Items to Note on 529 Plans

State LimitationsOften people question which state limits to follow when contributing to a 529 plan. Residence of the contributor? Residence of the beneficiary? The answer is…neither. The limits imposed are dependent on which state sponsors the plan. For most, this will be the state in which the contributor resides. Here in Ohio, the state limit is $414,000 to $426,000 contingent on the type of plan selected. Further, Ohio allows up to $2,000 in tax deductions for contributions to a 529 Plan. So, how much should be contributed annually? Contributors generally try to stay within the annual gift-tax reporting exclusion, which is $14,000, or $28,000 for a couple, per beneficiary. 529 Plans do have a special tax advantage that allow front-load contributions. In short, contributors can contribute $70,000, or $140,000 per couple all at once. However, this bars them from contributing to the same beneficiary for the subsequent four years.TransferabilityBeneficiaries can be changed with no tax consequences, but a change in beneficiary designation may not always be necessary. A strategy formulated by some is to transfer funds between beneficiaries in the earlier years of college to prevent reduction of potential FAFSA benefits. It should be noted that 529 Plan funds are not included in the calculation of FAFSA benefits. It is not until the funds are withdrawn for education purposes that they are included in the FAFSA benefit calculation.PenaltiesPenalties…a word no one likes to hear. Fortunately, this segment of the article focuses on when a penalty for withdrawal of unused 529 funds is waived. If these funds are withdrawn because college expenses were paid via scholarships, GI Bills, etc., then the penalty is waived. Earnings in the account are still subject to tax, but the contributions can be withdrawn tax and penalty free.To further discuss the benefits of a 529 Plan, contact us today in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.Rick Prewitt – the guy behind TTW...until next week.