Greeley Gift and Estate Tax Lawyer
Many people are interested in setting up a savings account or a college fund for their children but don’t realize that there can be costly tax implications. If you’re fortunate enough to have money to put aside for these reasons, we want to ensure that you’re handling your potential liabilities in the smartest way possible so your children can receive the sum you wanted to give them, and your taxes are kept to a bare minimum. If you have questions about setting up a 529 plan, let the Greeley gift and estate tax lawyers at Brady, McFarland & Lord, LLC assist you and help you avoid any unnecessary taxes. Call our office at (303) 420-2863 or contact us online to set up a free initial interview.
What Is a 529 Plan?
A 529 plan is a type of investment account that provides tax benefits when you use it to pay for qualified expenses, such as college tuition or expenses, apprenticeship programs, and student loan payments. It is a great planning tool to help reduce gift tax liabilities.
529 and Gift Taxes
If you set up a 529 plan for your child, it is viewed as a gift, and federal gift tax laws apply. You and your spouse can put up to $30,000 into the 529 annually without having to worry about gift taxes or filing a gift tax return. This counts against your lifetime gift tax limit as well.
Benefits of a 529 Plan
When you invest money into a 529 account, your investment will grow on a tax-deferred basis. Additionally, you are permitted to withdraw funds from the account tax-free if the money is used to pay for a qualifying expense, for example, a computer for college, and any of the items listed above. One of the most common purposes is to pay for a child’s education. A 529 account is similar to a 401(k). Any money earned from the 529 investment is not treated as taxable income. Furthermore, in Colorado, any contribution you make to your 529 can be deducted from your state income tax return.
Another benefit of a 529 account is the amount of control you have over the money invested. You get to control who can use the money and what it’s used for, and you can change this designation at any time you wish. Other types of accounts used to save for a child’s college expenses automatically turn the money over to them when they reach a certain age. With a 529, you can have the funds sent to you directly, and you can pay the education expenses yourself. Alternatively, you can have the funds distributed directly to your child or even directly to the educational institution.
Does a 529 Plan Affect Financial Aid?
In some circumstances, investing in a 529 account for your child could negatively affect their ability to receive financial aid. When applying for financial assistance, a parent’s assets and income are taken into account, so a 529 will be considered. However, there is usually a greater emphasis placed on a parent’s income rather than their assets when determining financial need, so a 529 might not affect your child that negatively. The implications on financial aid are usually not severe enough that it should deter you from setting up this type of account to help fund your child’s education.
What if a Grandparent Sets Up the 529?
Some people try to bypass the effect a 529 will have on a student’s financial aid eligibility by having a grandparent set up the 529. When a student applies for financial aid, the grandparent’s income and assets are not considered, so the 529 will have no bearing on their financial aid award. However, it’s crucial to note that when the grandparent takes out the money to spend on their grandchild’s education, the money will be considered as income for the student. When the student applies for financial aid the following year, it will appear that they make far more money than they actually do and they may be awarded less financial support than they really need.
Contact Our Greeley Gift and Estate Tax Attorney
If you want to help fund your child’s education and reduce your tax liability as well, a 529 plan is a good option. The Greeley estate planning attorneys at Brady, McFarland & Lord, LLC have been assisting our clients with their tax needs for decades, and we would be privileged to help you fund your child’s education in the most efficient way possible. Call our office at (303) 420-2863 or contact us online to set up a free initial interview.