Utilizing a 529 Plan in Your Wealth Transfer Strategy
Many consider 529 college savings plans to be solely used for education, but that is only one of its advantages. Families who use 529 Plans to invest and grow money tax-free for approved education expenses may also utilize these plans in an integral part of a management and wealth transfer strategy. Here’s how investment advisors use 529 Plans as a wealth transfer strategy to plan for changes in tax rates and create a vehicle to shift wealth to our clients’ younger family members.
What is a 529 Plan?
529 Plans are funded with after-tax dollars–similar to a Roth IRA. When you open a 529 Plan, the money your family puts away is able grow tax-free and is designed to encourage saving for future education expenses. All money taken out is tax-free as long as it is spent on qualified education expenses. These can be anything from tuition to room and board. However, the money in a 529 account can be used for other educational purposes as well.
Utilizing 529 Plans in a Wealth Management Strategy
Investment advisors typically utilize 529 Plans for two main reasons: to take advantage of compounding growth potential and to shift wealth to younger generations.
Naturally, the earlier you start saving, the more time your account has to grow. For example, if you start saving when your child is five years old, you have 13 years for the money in that account to grow tax-free. In contrast, if you wait until your child is 16 years old to start saving, you only have a few years for the money to grow.
Transferring Wealth Using a 529 Plan
A great reason to consider a 529 Plan is the ability to shift wealth to younger generations by paying for their college expenses. The less debt that your graduate has when they leave college, the bigger the head start they will have in life.
Wealthy donors often worry about gift taxes, which is a federal tax on transfers of money or property of more than $15,000, per recipient per year. If they gift more than their lifetime limit, they will owe gift taxes on the transfer. However, 529 plans offer an exception when used for qualifying educational expenses.
What if My Child Gets a Scholarship or Doesn’t Go to College?
If your child gets a scholarship you can withdraw the amount of the scholarship without paying the 10% penalty, but you will still need to pay taxes on the gains. However, before you do that, think about other ways beside tuition that he or she could use 529 funds. Here are some other expenses that may qualify.
- Room and board
- Off campus rent up to the cost of the school’s room and board
- School supplies
If you still have money left over in the 529 Plan or your child doesn’t go to college, you can change the account beneficiary to another qualifying family member, including yourself, without paying taxes on the earnings. Your son or daughter could even transfer it to their own child someday and use it for kindergarten through 12th grade expenses and college.
What If I Have More Than One Child?
If you have more than one child, you can open a 529 Plan for each child. In most cases, money in a 529 account is considered a parental asset. This means that the money will have less of an impact on financial aid eligibility.
For high-net-worth clients, setting up a scholarship is another tax-advantaged way to transfer wealth for educational expenses. Refer to our case study to see this strategy in action.
Outside of a 529 Plan, wealthy donors in a pinch may also multiply their $15,000 gift contributions for five years by adding $75,000 at once. Couples also have the option to double their transfer to $150,000 if their spouse gifts the same amount. Family members may use this strategy for multiple recipients, without the risk of gift taxes.
The Bottom Line
A 529 Plan can be a powerful tool in your wealth management and wealth transfer strategy, but for high-net-worth clients, there may be other strategies to consider as well. By taking advantage of the compounding growth potential and the ability to shift wealth to younger generations, you can create a wealth transfer strategy that helps future generations and meets your unique financial needs. Speak with a Morgan Rosel wealth advisor to see if a 529 Plan is right for your family.
This commentary reflects the personal opinions, viewpoints and analyses of the MorganRosel Wealth Management, LLC (“MRWM”) employees and guests providing such comments, and should not be regarded as a description of advisory services provided by MRWM or performance returns of any MRWM Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. MRWM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. MRWM may recommend the services of a third-party attorney, accountant, tax professional, insurance agent, or other specialist to clients. MRWM is not compensated for these referrals.