The 529 savings plan: A tax-smart way to fund college expenses

If you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. For contributions to the Alabama CollegeCounts 529 Fund, Alabama taxpayers are allowed to deduct a maximum of $5,000 per year when filing a single return and $10,000 per year for married couples filing jointly. Rollover contributions from another state’s 529 plan are also eligible for the Alabama deduction.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes, and typically for state purposes as well (unless the withdrawal is from a non-Alabama 529 plan), thus making the tax deferral a permanent savings.

529 plans offer other benefits as well:

  • They usually offer high contribution limits, and there are no income limits for contributing.
  • There’s generally no beneficiary age limit for contributions or distributions.
  • You can control the account, even after the child is of legal age.
  • You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).

The biggest downside may be that your investment options — and when you can change them — are limited. Please contact us for more information on 529 plans and other tax-smart strategies for funding education expenses.

Contact Bonnee Bailey – bbailey@abcpa.com, David Chandler – dchandler@abcpa.com, Cathy Mozingo – cmozingo@abcpa.com, or Rhonda Sibley – rsibley@abcpa.com for more information.