Cents & Sensibility —
The gift of a 529 savings plan

Beth Peabody

Last month’s column discussed inflation and how the recent uptick in this rate can impact your finances. We encouraged readers to avoid making short-term decisions regarding finances because of higher costs, as many experts estimate that price increases will dissipate as supply chains become less stressed. The action item for November suggested that readers start their Christmas shopping early to ensure loved ones receive your perfect gift.

With Christmas Day now approaching, many may be still searching for that “perfect gift” for younger loved ones. If you delayed this purchase, is it even possible to obtain given low inventories? Can it be delivered on time?

While Christmas morning can be full of joy as children open beautifully wrapped gifts, what if your gift could make a lasting impact – forever? Could the gift of education through the establishment of a 529 savings plan be the perfect idea this year?

In 1996, Sen. Mitch McConnell co-led a bipartisan effort to provide federal tax relief for all state-sponsored plans. The passing of Section 529 of the federal tax code, and the resulting tax-deferred treatment of the earnings when used for education, spurred the development by states nationwide of their own state-sponsored 529 savings plans.

A 529 savings plan works very much like a Roth 401(k) or Roth IRA. Your after-tax contributions grow tax-deferred and can be withdrawn tax-free if the money is used to pay qualified education expenses. The balance can be invested in a broad array of mutual and collective funds offered by a state’s plan.

Nearly every state offers Section 529 plans to its residents, but you are not limited to using your home state’s plan. Unlike many states, Kentucky residents receive no incentive for investing in the KY Saves 529 Plan. It recently underwent significant changes, which improved the investment options, however many other states offer a wider variety of choices.

Accounts are easy to establish online and there is great flexibility in how you can make deposits. Contributions may be made in a lump sum, deducted from your bank account on a predetermined basis or you can mail a check.

Once funded, consider selecting an investment option that is “age-based” which will automatically lower the allocation from 100% stocks at an early age, to a more conservative allocation as the child approaches eighteen. This strategy works in the same way a target-date fund does in a retirement plan, as discussed in prior columns.

The greatest attraction for grandparents and/or parents is the ability to fund a large amount now and to allow the balance to grow tax-free possibly for decades. There is no annual contribution limit to a 529 Plan, however an annual contribution in excess of the $15,000 ($30,000 per couple) gift tax exclusion could count against your lifetime estate tax and gift tax exemption.

The length of this column precludes me from sharing greater details, however the following resources will answer most critical questions:

Much like saving for retirement, the amount can grow significantly over time; the key is to get started.

What a perfect time of year to provide your loved ones with the long-lasting gift of education.

Action item for December: Improve your financial literacy by reviewing resources listed above and discussing them with your loved ones.

Beth Stegner Peabody is CEO of Stegner Investment Associates, Inc., and a graduate of Sacred Heart Academy.

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