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An Educated Investment: Estate Planning Benefits of a 529 Plan

Dec 28, 2016 10:00AM ● By MED Magazine
By Nathan Quello, CFP

With education costs climbing every year, it’s hard to imagine a better gift for a young student than a solid education fund. Fortunately for the giver, establishing a 529 education savings account can be just as beneficial for the account owner as its beneficiary.

Tax Free Growth

The owner of the plan does not receive any deductions or write-offs for contributions to a 529 plan, but once the funds are in place they grow tax-free if used by the beneficiary for any type of post-secondary education.
Whether they pursue undergraduate, graduate, or vocational programs, a 529 plan provides your beneficiary with a tax-efficient way to pay for tuition.

Low Risk, Low Penalties

While there are penalties for using 529 plans for non-education purposes—like starting a new business or other venture—they are quite modest. The account principal is returned to the beneficiary tax-free, and without penalties. The fund growth is subject to a relatively small 10% penalty, plus regular income tax rates. Considering most beneficiaries are young in their careers and in a lower tax bracket, these penalties tend to be very manageable.

Exceptional Control

When you establish a 529 plan, you’re not only investing in your beneficiary’s education and future, you’re protecting yourself from taxes that could be devastating to your estate, all the while maintaining complete control of the account.

Any funds you place in the 529 plan remain entirely in your control, but are considered a completed gift—meaning they grow outside of the owner’s estate and are protected from estate taxes or penalties.
Current law states that you can avoid paying estate taxes if you have less than $5.5 million in assets, but anything above that number gets taxed up to 45%. For people like small business owners and farmers, this can be a devastating tax. Imagine leaving your farming operation to your family only to force them into debt just to pay the estate taxes on your legacy.
Anyone can start a 529 plan for any beneficiary and contribution limits are tied to standard annual gifting limits—$14,000 (individual) or $28,000 (married couple) per year, per beneficiary. In the case of 529 plans, though, this gift limit can be accelerated to $70,000 or $140,000—the equivalent of five years of giving.
With so many tax advantages and no associated legal fees to establish, 529 plans are a good option for anyone who is saving for education, but excellent for people who want to defer taxes and maximize the value of their estate.

Nathan Quello is a Certified Financial Planner Professional with Loft Advisors in Sioux Falls.


First Dakota National Bank and Loft Advisors are independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, an independent broker/dealer, and are not insured by bank
Insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, and are not guaranteed by the bank, and are subject to risks, including the possible loss of principal.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer's official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.