Executive earning $550,000:
"I'm not using a 529 plan."
"We'll just pay for college out of cash flow."
But he didn't realize how flexible 529 plans have become.
𝗦𝘁𝗮𝘁𝗲 𝘁𝗮𝘅 𝗯𝗲𝗻𝗲𝗳𝗶𝘁𝘀:
→ His state offered $10,000 of state tax deductions regardless of income level
→ Immediate tax savings on contributions
𝗞-𝟭𝟮 𝗽𝗿𝗶𝘃𝗮𝘁𝗲 𝘀𝗰𝗵𝗼𝗼𝗹:
→ Can now use up to $20,000 annually for private elementary/high school
→ Qualifying expenses have broadened
→ Tax-free growth for expenses he was already planning
𝗥𝗼𝘁𝗵 𝗰𝗼𝗻𝘃𝗲𝗿𝘀𝗶𝗼𝗻 𝗼𝗽𝗽𝗼𝗿𝘁𝘂𝗻𝗶𝘁𝘆:
→ Unused 529 funds can be rolled to Roth IRAs (up to $35,000 lifetime)
→ Tax-free growth even if not used for education
𝗙𝗮𝗺𝗶𝗹𝘆 𝗳𝗹𝗲𝘅𝗶𝗯𝗶𝗹𝗶𝘁𝘆:
→ Can transfer between children
→ Can be used for grandchildren
Many people don't realize they've become much more flexible.
But here's they key:
A 529 shouldn't be your ENTIRE plan.
It should be a piece of the plan.
One of the other year end things we have been doing for some clients is additional RESP withdrawals.
Since the $8,000 EAP limit is for the first 13 weeks - it might make sense to take a bit more out now.
Especially if the student has 0 or almost no income this year. 👇
Since the basic income exemption (Approximately $16,000 in Ontario) means no tax paid - it makes sense to try to take additional EAP out during 0 income years.
For students in their first year of post-secondary they are at the most likely to still be within those thresholds.
They only had a 2 month summer coming off high school so even if they had a summer job - this is the shortest time period.
Hourly income tends to be lower as well.
As a result - they may often only have a few thousand dollars of taxable income.
If we take the example of someone who earns $17.60 an hour working 37.5 hours a week for 10 weeks:
$17.60 * 37.5 * 10 = $6600
With a basic exemption in Ontario of $16,129 this leaves $9,529 of extra "tax free income" we could use up.
Insert the extra EAP from an RESP.
The extra $1529 we take out means getting a 0% tax rate instead of risking it at a 15% tax rate or higher (Federally)
$229.35 in additional tax savings potentially!
They "might" be in the 0% tax bracket in the future but it's less likely and usually not to the same degree.
2 reasons it's less likely:
1) Students often find part time work of some sort during post secondary schooling.
2) Summer is 4 months long and so even a minimum wage job full time or an internship eats up most of that income level pretty quickly.
A 16 week summer = $10,560
That would mean only $5,569 in EAP that can be taken out "tax free" and that assumes no other part time income.
So...you can see how quickly that basic exemption can be eaten up.
This also applies potentially for business owners who pay their kids to work in the business.
Is this big dollars?
For most of our clients - not at all.
However - we try to be mindful of these little things for our clients because we can. They appreciate knowing the planning service expands to these little things they would often never think about.
I just encountered an interesting situation around what to do if a student is consistently in a situation where the income is higher than that basic exemption.
So...more thought to come on that soon!
With the cost of college continuing to rise, many parents are turning to 529 plans as they offer tax savings opportunities.
On the federal side, not only do funds grow tax-deferred but if funds from the account are used for qualified educational expenses, all earnings will be tax-free.
On the state side, most states with an income tax allow either a deduction from income or a state tax credit for 529 plan contributions and most states also allow any contributor, not just the account owner, to claim the applicable tax benefits on their tax return. However, not all states follow the federal tax treatment of K-12 tuition or student loan expenses.
In most cases, taxpayers must contribute to their home state’s plan to qualify for a state income tax benefit. However, nine states offer a state income tax benefit for contributions to any 529 plan and not only in-state plans:
Arizona
Arkansas
Kansas
Maine
Minnesota
Missouri
Montana
Ohio
Pennsylvania
Finally, most states have a contribution deadline of the end of the calendar year (December 31) to qualify for a 529 plan tax deduction on their tax return for that tax year. However, taxpayers in Georgia, Indiana, Iowa, Missouri, Oklahoma, South Carolina and Wisconsin have until April of the following year to make a deductible contribution.
Did you know that if there are funds remaining in a 529 account after the beneficiary completes their education, you may be able to rollover up to $35,000 to their Roth IRA without incurring the 10% penalty for non-qualified withdrawals or generating any taxable income?
#taxes#financialliteracy
Are you saving up to help pay for your children’s college expenses someday? If so, are you using a 529 savings plan?
For those unfamiliar with the term, think of a 529 as being very similar to a Roth IRA. However, instead of the funds being used for retirement, they will go towards paying for higher education expenses. In a nutshell:
-Post-tax contributions are made regularly to the account
-Once inside, the funds get invested and grow over time
-As your children enter into college, withdrawals can be made tax-free and put towards any qualifying expenses: tuition, room and board, fees, books, etc.
The catch to all of this is what happens if your child doesn’t go to college or there are unused funds leftover in the 529 plan after they graduate. When withdrawals are made for any purpose other than post-secondary education expenses, they’re labeled as “unqualified” and subject to taxes and penalties.
Thankfully, that’s about to change in a BIG way.
Starting in 2024, parents will now be able to roll unused 529 funds into a Roth IRA for their child. Lifetime amounts totaling up to $35,000 can be transferred both tax and penalty-free.
It’s all part of something Congress passed back in December 2022 called Secure 2.0. This was a bill that brought about many needed changes to retirement plans such as bigger catch-up contributions for older workers and later starting ages for RMDs (required minimum distributions).
This new conversion policy makes 529 plans a win-win. Parents win because they get the opportunity to generate tax-free earnings for their children’s education. Students win because not only will they be less dependent on student loans, but they might also have something left over to help jump-start one of the best retirement plans any adult can take part in - a Roth IRA.
I know that if I had had the opportunity to have any amount of money deposited into my Roth IRA at such a young age, that would’ve been warmly welcomed. Therefore, I encourage parents to do the smart thing and take advantage of these 529 savings plans. Not only will it serve as the foundation for their higher education, but it will also help put them on the right path toward financial adulthood.
https://lnkd.in/gnztUnJi
Annie’s Answers Part 3: Save and Benefit
College Saver 529 Accounts
As everyone knows at this point, college is incredibly expensive. Loans can be a very painful way to start a post-graduation life, but are many times necessary for the field you want to go into.
If you have the ability or desire to start saving for your kids education, or even your own continued education, a state sponsored 529 account may be a good option to consider.
Things you should know:
1. This is an account you save Post-Tax income towards college/post-K12 education, that can be invested and grow tax-deferred over time. And as long as you use the funds from the account for qualified education expenses, any gains/earnings can be withdrawn **Tax Free.**
2. You can use 529s for college tuition, universities, professional school, graduate school, room, board, books, fees… and some (not all) states allow you to use it towards private K-12 schools.
3. MANY (but not all) states allow contributions to be eligible for state income tax deductions.
4. If you are a continuing education adult, currently paying for your own school or considering it… if your state offers a state-level tax deduction, you can contribute to your own account, and get a tax deduction for that contribution.
5. If one child doesn’t use the money in their account for any reason a sibling or another family member can have the funds rolled over to be used by them instead.
6. If your child doesn’t use it at all, you will pay income taxes and a 10% penalty, but ONLY on the gains/earned portion, not on your contribution. (Your contributions do not get taxed again since this was post tax funds).
I was lucky enough to get a full ride to college, but it didn’t cover things like books and fees and food plan. I was able to use what my parents saved in a 529 for that and then was able to roll over some for my brother to use.
I also went back for my 2nd masters and was in a state that gave a state tax income tax deduction. So I contributed to my own account, withdrew from that account, paid for my tuition and got a state tax deduction for using it, even though it was only in the account for a very short period of time.
This is not for everyone, and there are a lot of different ways to save or pay for college.
But… it’s a good program to keep in mind as an option.
#AnniesAnswers#SamStats