529 Account End of Year Planning: 5 Steps to Take

 

529 Account End of Year Planning: 5 Steps to Take

 

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As the end of the year rapidly approaches, it’s the ideal time to invest funds for future education. If you have a 529 account or if you are trying to save for college expenses, then you should consider a few key actions as 2022 draws to a close. Think of these 5 things as your annual college savings housekeeping.

  1. Maximize Gifting
  2. Consider Super Funding
  3. Claim Your State Income Tax Deduction (if you can)
  4. Review Your Investments
  5. Invest (if you haven't already)

Maximize Gifts

Contributions to a 529 plan are considered gifts for federal tax purposes. This means the federal gifting tax applies. However, most families who contribute to a 529 plan will not pay gift taxes because of the annual gift tax exclusion amount. If your total gifts are less than the annual amount per recipient, you do not have to pay gift taxes.

In 2022 the gift tax exclusion is $16,000 per individual or $32,000 for a married couple filing jointly. This means you can contribute up to that amount without federal gift taxes. Effective January 1, 2023, the federal annual gift tax exclusion increases to $17,000 for a single individual and $34,000 for married couples.

The exclusion is calculated annually and assists with maximizing your account balance while minimizing your tax burden. The end of the year is an ideal time to make additional contributions if you haven’t reached the limit in 2022.

Keep in mind that the gifting exclusion is for all gifts to an individual, not just 529 contributions. If you’ve gifted property, cash, or other things in the calendar year, you’ll need to account for all gifts made in compliance with the $16,000/$32,000 limit for 2022.

Consider Super Funding Your Account

If you are looking to jump start a 529 account, you can consider front-loading or super funding the account. The end of the year is a great time to do this.

Super funding allows you to front-load a large 529 contribution without having to pay the gift tax. You can front-load five years of 529 contributions into a single gift and avoid having to pay the annual gifting tax. This means you can contribute $16,000 x 5 years, for a total of $80,000 at once (or $180,000 if you are married and filing jointly) in 2022.

If you do this, you would not be able to contribute to the account for the next five years without paying gifting taxes. It’s a smart strategy because the longer funds are in a 529 account, the more time they have to grow. If you are able to front-load a large contribution instead of contributing a smaller amount over the course of five years, it can help to maximize your account balance and potential earnings.

This strategy is often used by families with large estates that are interested in minimizing their heirs’ estate taxes. The federal estate and gift tax lifetime exemption is $12.06 million per person in 2022. If you expect your estate to be greater than that amount when you pass away, super funding a 529 can help lower the taxable value of your estate, since 529 accounts are exempt from estate taxes.

Claim Your State Tax Deduction

Many states allow you to claim a state tax deduction on contributions to a 529 plan annually. If you live in one of these states, make sure you know how much you contributed in 2022 so you are ready to claim the full amount you are eligible for when you do your taxes.

For New Mexico residents, 100 percent of contributions to The Education Plan® are deductible from your state income taxes when funds are used to pay for qualified education expenses.

Every state has different rules, so make sure you understand the requirements in your state.

Review Your Investments

IRS regulations allow you to change your 529 investment selection two times within a calendar year without any penalties. The end of each year is a great time to review your 529 investments and ensure they still meet your needs.

To review your investments or changes your selections in an account with The Education Plan, you can log into your account and click “Change Investment Options” on the left-hand toolbar.

Open An Account

If you haven’t opened a 529 account yet, or if you’ve been meaning to open an account for another family member, now is the time. If you live in a state like New Mexico that allows you to deduct your contributions from your state income taxes when used to pay for qualified expenses, opening an account and making a contribution can help ease your tax burden when it comes time to file in 2023.

Remember, it’s never too early or too late to start saving for college. The best time is always now! You can open an account with The Education Plan here.

 

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For more information about The Education Plan, call 1.877.337.5268 or view the Plan Description and Participation Agreement, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing.

Please Note: Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. You also should consult a financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plan’s features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

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