May 29th: Celebrate National 529 Day!

Did you know that May 29th marks National 529 Day? It’s a little-known “celebration”  day, but it’s an important time to explore the benefits of 529 educational savings plans.  

Designed to support the college education expenses of children and grandchildren,  these plans offer a range of tax advantages and flexibility, making them an attractive  option for parents, grandparents, and students.  

Whether starting early for a child or grandchild’s college fund or preparing for your own  continuing education, understanding 529 plans can help you make informed decisions  that align with your current and future financial strategies.  

In today’s blog, we’ll discuss how investing in a 529 plan can be a smart way for your  family to pursue educational goals in the future. We’ll also compare the 529 plan to the  Dynasty 529 plan, which offers slightly different options.  

The Origins of the 529 Plan 

529 plans were created as part of the Small Business Job Protection Act of 1996. The  plans are named after Section 529 of the Internal Revenue Code, which governs their  operation. Initially, these plans were focused on providing tax advantages for college  savings.  

Following are brief descriptions of the primary tax benefits associated with 529 plans: 

• Tax-Free Earnings: The investments inside a 529 plan grow tax-free. Any  interest, dividends, or capital gains earned on the account are not subject to  federal (and typically state) income taxes as long as the funds are used for  qualified education expenses.  
• Tax-Free Withdrawals: Withdrawals from a 529 plan are tax-free if used for  qualified education expenses. Qualified expenses include tuition, fees, books,  supplies, and equipment required to enroll or attend an eligible educational  institution. Room and board are also qualified expenses if the beneficiary is at  least a half-time student. 
• State Tax Benefits: Many states offer tax deductions or credits for your state’s  529 plan contributions. The specifics vary by state, but these benefits can  provide significant tax savings at the state level. 
• Gift Tax Benefits: Contributions to a 529 plan are considered completed gifts to  the beneficiary for federal gift tax purposes. This allows contributions to qualify  for the annual gift tax exclusion of $18,000 per beneficiary per year (as of 2024).  Additionally, a special provision allows for “super funding,” where you can make  five years’ worth of contributions ($90,000 per beneficiary) in a single year  without incurring gift taxes. 
• Estate Tax Benefits: Contributions to a 529 plan are removed from your estate,  which can help reduce potential estate taxes. This makes 529 plans an effective  tool for minimizing your taxable estate while saving for your beneficiaries’ future  educational expenses. 
• Flexibility and Control: You retain control over the account, including changing  the beneficiary to another qualified family member if needed, without incurring  taxes or penalties.

What is a Dynasty 529 Plan? 

The Dynasty 529 plan, also known as a Multigenerational 529, evolved as financial  advisors and high-net-worth individuals recognized the potential for using 529 plans for  long-term, multi-generational educational funding.  

This approach leverages the tax advantages of 529 plans while incorporating estate  planning strategies to benefit multiple generations. 

Understanding the Differences of a 529 Plan Compared to Dynasty 529  

A 529 plan and a Dynasty 529 plan are tax-advantaged savings plans designed to help  you save for education expenses, but they differ in structure and purpose.  

Here’s a breakdown of the differences: 

529 Plan 

As noted earlier, the 529 plan is a tax-advantaged savings account designed to  encourage saving for future education costs. The funds can be used for various  educational expenses, including tuition, fees, room and board, and supplies at eligible  educational institutions. 

Key Features: 

1. Contributions are made with after-tax dollars, but earnings grow tax-free, and  withdrawals for qualified education expenses are also tax-free. 
2. Contribution limits vary by state but are generally quite high, often exceeding  $300,000. 
3. As the account owner, you designate a beneficiary, usually a child or grandchild.  The beneficiary can be changed if needed to a qualifying family member. 
4. Funds must be used for qualified education expenses, or there will be taxes and  penalties on earnings for non-qualified withdrawals. 
5. Some states offer tax deductions or credits for contributions to your state’s 529  plans.

Dynasty 529 Plans 

A Dynasty 529 plan is a variation of a traditional 529 plan with a long-term, multi generational approach. It is designed to provide educational funding for multiple generations within a family. 

Key Features: 

1. Like traditional 529 plans, Dynasty 529 plans benefit from tax-free growth and  withdrawals for qualified educational expenses. 
2. The plan is structured to last for multiple generations, providing educational  funding for children, grandchildren, and even great-grandchildren. 
3. Given their long-term nature, contributions can be substantial. This often involves  front-loading contributions within gift tax limits and using generation-skipping  transfer tax exemptions. 
4. Dynasty 529 plans can be part of a broader estate planning strategy, helping  reduce the contributor’s taxable estate while providing educational benefits for  future generations. 
5. Beneficiaries can be changed as needed to suit the educational needs of  different qualified family members over time. 

Key Differences 

• Traditional 529 plans typically focus on a single generation’s education  expenses, while Dynasty 529 plans are designed to last for multiple generations. 
• Dynasty 529 plans are often integrated into estate planning strategies to manage  and transfer wealth across multiple generations more effectively. 
• Dynasty 529 plans usually involve larger, front-loaded contributions and utilize  gift and estate tax exemptions to maximize long-term growth and benefits. 

About Brown|Miller 

At Brown|Miller Wealth Management, we understand that high-net-worth families face  unique challenges in college education planning.  

Our team of experienced Washington, DC. financial advisors can help you navigate  these complexities by developing personalized strategies that align with your financial  goals. We offer comprehensive services that include assessing your family’s financial  situation, exploring various funding options, and integrating education savings into your  broader wealth management plan.  

Our approach seeks to maximize your savings while minimizing tax liabilities, providing  peace of mind as you prepare for the significant financial commitment of higher  education. 

We help you work through the education funding process, from selecting the right  savings plan to optimizing contributions, incorporating that into your tax plan, and  understanding state-specific benefits.  

We also offer advanced strategies, such as the Dynasty 529 plan, to help you create a  multi-generational educational legacy.  

By leveraging our expertise in investment management, we ensure that your 529 plans  are effectively integrated into your overall financial strategy, securing your family’s  educational future while preserving and growing your wealth.  

To learn more about our educational planning services; connect with us.

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