Kelly Bullis
I’m sure you’ve noticed that the cost of college tuition has been climbing MUCH higher than the annual inflation rate.
I would love to have somebody explain how that is possible. In the meantime, it’s always a good idea to save up for paying for postsecondary education costs, rather than have to pay for them at the time they occur.
Most of us struggle with procrastination. Others struggle with trying to get ahead before we can save for things like kids/grandkids college costs. There is good news for both. Funding for college savings using a Section 529 plan in one large contribution.
FYI, a Section 529 plan is a college savings plan or prepaid tuition plan operated by each individual state. As long as the rules are followed, there is no federal income tax on the accumulation of earnings and no tax on the ultimate distribution when used for paying qualified tuition expenses.
Each state must set the limits on the amount of contributions allowed to a college savings plan. There is a special rule which allows you to fund up to five years’ worth of annual federal gift tax exclusions for a lump-sum contribution to a 529 plan account.
Basically, the contribution is considered a gift that is spread out over a five-year period. For 2024, the exclusion amount is $18,000 per year, per person. Thus, you could front load a Section 529 plan with a contribution of $90,000 (5 x $18,000).
In taking advantage of this special rule, you don’t have to file a gift tax return because you went over the annual exclusion amount of $18,000. If you are married, you can double that. (Each of you give five times your annual gift exclusion amount.)
Thus, $180,000 into a Section 529 plan for a single child. The beauty of a Section 529 plan is that anyone can contribute to one on behalf of a named beneficiary. That means, grandparents. They are usually the ones with the extra money to put into one of these plans. Bonus. You can fund separate accounts for multiple children or grandchildren.
There is another new bonus thanks to the SECURE Act 2.0. Any unused amount in a section 529 plan after a child is finished with college can be rolled over into that child’s ROTH IRA account, thus helping them get started on retirement savings.
By the way, I happen to believe that college is not for everybody. The good news about Section 529 plans is that the qualified tuition it can be spent on includes trade schools, vocational schools, and apprenticeship programs.
I once had a client who sent their son to a special vocational school to become an auto mechanic. Once he graduated, he got a job at a local high-end auto dealership with a very high starting salary.
Have you heard? Proverbs 24:27 says, “Prepare your work outside, and get your fields ready. Afterwards, build your house.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459, on the web at BullisAndCo.com, also on Facebook.