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Exploring the Many Options for College Funding
from Bell Wealth Q3 2023
by Bell Bank
Assisting your beneficiary – your child, grandchild, relative or friend –with funds for education is fulfilling and rewarding … but it may take some research to determine the best method for you and the recipient. There are a number of avenues that can accomplish the goal of helping someone pay for their education, including setting up a 529 plan, making a gift directly to the student or a qualified educational institution, establishing an educational trust or using Roth IRA funds. Let’s explore these options.
529 Plans
Every state offers a 529 plan, and some states offer more than one type of plan to consider. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code. Plan criteria, including contribution funding, maximum account balance limits and fees, vary from state to state.
Each state plan may offer different advantages. For example, North Dakota’s plan offers up to a $300 match for North Dakota residents, a new-baby match up to $200 when opening an account for a baby up to 12 months old and a kindergarten kickoff match up to $100 for children of kindergarten age. Check with your state to learn about possible matches or tax credits.
Funds from a 529 plan can be used for college tuition, fees, applicable room and board, required course supplies or student loan repayment, as well as tuition expenses up to $10,000 annually for K-12 public, private or parochial schools.
Gail Jacobson Blair CFP®, CTFA® VP/Senior Wealth & Fiduciary Advisor
If your beneficiary decides not to attend a qualified school, the account owner can name another beneficiary (subject to the individual plan) or take a non-qualified withdrawal, which is subject to 10% federal penalty and applicable federal, state and local taxes (some exceptions apply, including for a student attending a U.S. military academy or receiving a scholarship). The account owner has control of the 529 account until funds are withdrawn.
With you as the account owner of a 529 plan, the assets have relatively little impact on the beneficiary’s federal financial aid eligibility. Tax benefits vary depending on the state, with a number of states offering a state income tax credit. The 529 plan earnings grow tax-free over a period of time.
While there is no annual contribution limit, contributions are considered gifts for federal gift tax purposes. For 2023 the annual gift tax exclusion is $17,000 per year ($34,000 if married, filing jointly) per beneficiary. You can contribute more, but additional amounts may have gift tax implications. There is no limit to the number of accounts a beneficiary may have – they can have multiple accounts in multiple states.
Gifting Directly To A Student
Funds can be gifted directly to the student for use toward educational expenses. This gift would be included in the annual gift tax exclusion amount of $17,000 per year ($34,000 given by a married couple) and may impact the student’s federal financial aid eligibility.
Direct Payments To An Accredited Educational Institution
Payments made directly to an accredited educational institution are not included in the annual gift tax exclusion or an individual’s estate and gift tax exclusion and therefore are unlimited. For grandparents, payments are not subject to the generation-skipping tax limitations.
Establishing A Trust To Gift Funds For Education
A parent or grandparent could work with their attorney to establish an irrevocable trust to cover education expenses. An advantage of this is the trust can be established for multiple beneficiaries and generations. A disadvantage for the beneficiary is that they will have to report this trust as their own money when applying for financial aid, and potentially limiting their eligibility. Also, earnings are taxable.
Roth Ira Withdrawals
Contributions to a Roth IRA can be withdrawn without penalty to pay for college expenses. Withdrawals can be made to fund expenses for yourself, a child or grandchild. Income limitations apply for contributions to a Roth, so you should visit with your CPA to determine your eligibility. Using Roth dollars to cover tuition may take planning if the child would otherwise be eligible for financial aid, as Roth IRA withdrawals are included in the financial aid calculation.
Contact Us
With the number of options available to fund education, those with a desire to do so should be able to find a plan that fits their situation. Because gifting and tax rules are complex, you should seek advice from your financial advisor, attorney or CPA. Please contact us at 701.451.3000 to review options for educational funding.
2023 Tuition and Living Costs Summary By States
Table compares the average college costs for the academic year 2022-2023.
