Welcome To the First Installment of MSM Mondays!
We’re excited to launch MSM Mondays, our new biweekly series of business insights designed with small business owners in mind. Helping entrepreneurs succeed is our passion, and one of the best ways we can do that is by sharing practical and relevant accounting, tax, and business knowledge that can help you make informed decisions.
Please note that the information shared in MSM Mondays is intended for general informational purposes only. It is not a comprehensive analysis of every situation, nor should it be considered a substitute for personalized accounting, tax, or legal advice. Because every business is unique, we encourage you to consult with a CPA regarding your specific circumstances. If you have questions or would like guidance tailored to your business, our team is always happy to help.
The Fall Semester is Right Around the Corner – Is a 529 Plan the Right Choice For Your Family?
As students prepare to head back to school this fall, many families are thinking about tuition, books, and other education expenses. As a business owner, we know that taxes are simply a part of everyday life. You have to think about your taxes, your employees’ taxes, and your business’ taxes. Tax benefits are like a breath of fresh air. If education costs are a part of your future… or even your present… then a 529 Plan can be a valuable tool for building those savings while also taking advantage of potential tax benefits.
What Is a 529 Plan?
529 Plans are special savings accounts specifically for education. They are qualified tuition programs maintained by a state, state agency, or eligible educational institution. When you create a 529 Plan, you can name a designated beneficiary of your choice: your children, grandchildren, nieces and nephews, or even yourself, depending on the account setup and specific program rules! You can also contribute to someone else’s 529 account, or invite your friends and family to contribute to yours.
What Are the Tax Benefits?
529 Plans incentivize saving for education by offering tax benefits. Any contributions that you make to a 529 plan are not tax deductible as far as federal tax is concerned, meaning they are made post-tax. The tax benefits come in on the back end. The contributions that you make to your 529 Plan are invested, allowing the account to grow over time. As that growth – known as earnings –
A 529 Plan is akin to an investment portfolio: your money will make earnings as it stays in the account. However, unlike your investments, your 529 Plan earnings will accumulate tax-free as your investment grows. When you withdraw money from your 529 Plan to be used for your beneficiary’s education, those distributions and their respective earnings also are excluded from your income and remain tax-free to the extent that they are used for qualified educational expenses. Your state may also offer state income tax deductions or credits. If you make contributions in large amounts, then it is important to remember that they are treated as a completed gift for tax purposes, and there is a limit per donee to the annual gift tax exclusion.
What Expenses Qualify?
It is important to remember that there are qualified tuition programs, and only qualified distributions are tax free. This means that, if you withdraw money from a 529 Plan for non-qualified expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional tax penalty. School expenses for K-12 qualify, but there is a limit on qualified expenses of $20,000 per beneficiary. Qualified expenses for postsecondary education include tuition, fees, books, supplies, equipment, and room and board. Room and board has additional requirements in order to qualify, including the student being enrolled half-time and the distribution not exceeding the school’s room and board cost-of-attendance allowance (typically posted on the school’s website). There are additional expenses that may qualify, including registered apprenticeship expenses, education loan repayments, and postsecondary credentialing expenses. If a distribution exceeds the beneficiary’s qualified expenses, then the earnings portion of the excess distribution is subject to additional tax.
Is a 529 Plan Right For You?
For many families, a 529 Plan is one of the most effective ways to save for future education costs while taking advantage of valuable tax benefits. Whether you’re planning years in advance or looking for ways to help with current education expenses, it’s worth exploring whether a 529 Plan fits into your overall financial strategy.
If you’re a business owner or would like guidance on education planning, tax strategies, or other financial planning opportunities, we’d be happy to help. Contact our team to discuss how a 529 Plan may fit into your long-term goals, and be sure to follow us on social media for more tax and financial planning insights.
