How to create a legacy with 529 Plans. Key factors, benefits and funding strategies.
Meet Sarah and James, a high-net-worth couple living in Illinois. With an estate that is currently subject to Illinois estate tax. They are keenly aware of the long-term growth potential of their investable assets. On track to never outlive their money, Sarah and James realized it was time to look for ways their wealth could make a lasting impact on their family and future generations.
The Basics: Why a 529 Plan?
A 529 plan is a tax-advantaged savings account designed for educational purposes. Investments in these plans grow tax-free and can be withdrawn tax-free when used for qualified educational expenses such as tuition, books, and room and board. But the benefits of a 529 plan go far beyond funding college:
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Tax-Free Growth and Distributions: The money you invest in a 529 plan grows tax-free, and distributions for qualified education expenses are also tax-free, making it an excellent vehicle for maximizing your savings.
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Estate Planning Benefits: 529 plan assets are not considered part of your taxable estate. By funding a 529 plan, you can reduce your estate tax liability while simultaneously supporting your family’s educational aspirations.
A Strategy for High-Net-Worth Families in Illinois
Facing potential Illinois estate taxes, Sarah and James decided to leverage the overfunding potential of 529 plans as part of their estate planning strategy. They made substantial contributions to accounts for each of their grandchildren, taking advantage of the ability to front-load up to five years’ worth of annual gift tax exclusions per beneficiary. This allowed them to reduce their taxable estate while ensuring that the funds could support their family for generations.
With proper planning, the excess funds in these accounts can grow significantly over time. For Sarah and James, the goal was clear: after their grandchildren completed their education, any remaining funds could be redirected to future generations, creating a lasting legacy of educational opportunities.
The Rollover Advantage: From Education to Retirement
One of the lesser-known but powerful benefits of a 529 plan is the ability to roll over unused funds to a Roth IRA in the name of the beneficiary. Here’s how it works:
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The 529 plan must have been open for at least 15 years.
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Up to $35,000 of the account value can be rolled over to a Roth IRA for the beneficiary, provided they have earned income in the future.
This unique feature offers a dual benefit: it ensures that excess funds are not wasted and provides the beneficiary with a head start on retirement savings. For Sarah and James, this was a game-changer. They knew that even if their grandchildren received scholarships or didn’t use all the funds for education, the money would still contribute to their long-term financial security.
Avoiding Common Misconceptions
It’s easy to overlook the flexibility and strategic advantages of a 529 plan. Some may assume that unused funds are penalized or locked away indefinitely. However, by working with a knowledgeable advisor, Sarah and James were able to:
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Understand the flexibility of 529 plans, including beneficiary changes within the family.
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Explore how excess funds could serve multiple purposes, from educational opportunities to retirement planning.
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Maximize the tax advantages to align with their broader financial and estate planning goals.
The Legacy Sarah and James Built
Through their strategic use of 529 plans, Sarah and James achieved their goals of reducing their taxable estate, funding education for their grandchildren, and creating a legacy that could extend for generations. They felt confident knowing their financial planning reflected their values of education and opportunity.
For families in Illinois or other states with estate taxes, a 529 plan is more than just a college savings account. It’s a versatile tool that can adapt to changing circumstances, support multigenerational planning, and even provide a bridge to retirement savings. Whether you’re looking to fund education, reduce estate taxes, or leave a lasting impact, a 529 plan could be the key to unlocking your goals.
Are you ready to explore how a 529 plan can fit into your financial journey? Let’s start the conversation.
This story is built on 529 Plan rules and tax laws as of December 2024. Before investing in a 529 Plan consider your personal financial plan and goals. This article is for educational purposes only and should not be considered investment advice. Talk to a licensed advisor to learn more about 529 Plans and other gifting strategies.
Disclosure: The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
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Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Fixed insurance offered through James K. Lancaster. Cambridge and Sterling Edge Financial are not affiliated. Cambridge does not offer tax advice.