Tax Blog

Investing in Education: Benefits of a Section 529 Plan.

The costs of education are rapidly increasing, even for elementary and secondary schools. While the 529 plan is available for anyone, even yourself, it is most commonly set up for younger individuals. Investing and saving for your children’s or grandchildren’s education is becoming more and more of a necessity. Section 529 of the Internal Revenue Code (“IRC”) provides several benefits for creating and investing in a 529 plan. A 529 plan is operated by a state or educational institution providing several federal and potential state tax benefits.

The main advantage of investing in a 529 plan is that contributed earnings will not be subject to federal income tax. This means that the money will grow unaffected by federal income tax and potentially receive additional state tax incentives. For example, in Illinois, earnings invested into a 529 plan are free from both federal and Illinois state income taxes for both the initial investment and subsequent qualified withdrawal. Illinois (not the federal government) also offers the option to fully deduct the investments in to “Bright Star” and” Bright Directions”. Many states offer similar incentives. While the investment is not federally deductible, the earnings are not taxed if withdrawn by the beneficiary for an eligible educational expense. These expenses include: tuition, fees, books, and even room and board at eligible institutions.

Another benefit of saving for a child's future education with a 529 plan, is that contributions are considered gifts for tax purposes. The 2019 annual gift tax exclusion limit is up to $15,000 per individual, the same as in 2018, and up from $14,000 in 2017. This means if you and your spouse have two grandchildren (or children) you can jointly give $60,000 without gift-tax consequences, since each child can receive $15,000 in gifts from you and $15,000 in gifts from your spouse. In terms of educational savings options, Section 529 plans offer some of the best tax benefits while allowing the contributor to retain the most control over the account.

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