A 529 plan is an investment account in which you set aside money for education savings in exchange for certain tax benefits. Parents of young children can start putting funds in a 529 plan to pay for future college tuition. Here’s what you should know about a 529 and how an accountant can help.

How Do 529 Plans Work?

After an accountant sets up a 529 plan, contributions can be made from the parents, grandparents, and other family members of the beneficiary and others not related to the beneficiary, including corporations and trusts.

There’s no yearly limit to how much any one source can contribute to a 529, but the lifetime limit is $500,000 per designated beneficiary across all accounts in Texas-sponsored 529 plans. There’s no age limit for beneficiaries, and the funds can be used for undergraduate, graduate, or professional trade school tuition as long as the school accepts federal financial aid.

How Do They Affect Taxes?

The earnings in a 529 are not taxed, and no federal taxes are incurred when the money is taken out to pay for college. If a contribution to a 529 is a gift, the contributor only pays taxes on it if the amount is over the $15,000 annual gift tax exclusion. As a 529 contributor, you can make an initial contribution of up to $75,000 and claim it as a five-year gift, thereby meeting the $15,000 per year gift tax exclusion.

What Happens When You Withdraw Funds?

First, calculate how much you'll need to withdraw from the 529. This should include all college expenses minus any tax-free educational assistance like scholarships and veteran's assistance.

Withdraw the amount during the same year in which the expenses are to be paid. For example, don't pay spring tuition during the previous fall. Fill out a withdrawal request, submit it, and the account provider will either send the requested funds directly to the school or to the college-aged beneficiary.

Your accountant will guide you through this process. Any leftover funds can be used for future costs like graduate school or for another qualifying family member's education expenses.

When you need assistance with a 529 plan, the accountants at Young Hoy & Burnett CPA in Texarkana, TX, can help. For more than 40 years, this firm has been serving the Four States Area. They offer a variety of financial services, including bookkeeping, tax return preparation, and business consulting. Call (903) 794-2211 to schedule a consultation, or visit them online to learn more about their areas of expertise.