Stuck with big losses in your 529 account this year?
The Wall Street Journal reports on a way you may be able to deduct these losses. But be forwarned: there are many caveats, especially if your state offered up front tax benefits for your contributions. And if you child isn’t going to school in the next year or two, do you really want to withdraw funds from your 529 account with stock prices are this low?
Here’s the explanation, in part:
Imagine a couple that put $120,000 into a 529 tax shelter for a grandchild a year ago. If the market had continued to boom, that money would have grown tax-free. As long as it was eventually spent on qualified tuition expenses, no tax would have been paid on withdrawals. These 529 plans are terrific tax shelters for middle-class couples with children or grandchildren.
Obviously, though, investing has been a hazardous occupation of late. Imagine that same couple now looks at the 529 and realizes those investments have plunged to just $70,000 in value.
Yikes. That’s a $50,000 loss.
The couple can close the account and withdraw the money. At that point, they may be able to deduct nearly all of that loss from their taxable income. That wouldn’t restore all the money lost, but could at least soften the blow.
Many Americans may be missing out on this deduction. Most 529 plans are sold through financial advisors, but comparatively few know about this rule. (For those seeking more details, they can be found in IRS Publication 970, Tax Benefits for Education, page 51, and in the Federal Register, Vol. 73, No. 13, page 3445.)
My daughter just turned 2, and I started investing in her 529 plan when she was about 3 months old. Needless to say, the account isn’t worth as much as I’ve put into it.
No one is happy about the global stock market crash. But that doesn’t mean you should stop contributing to 529 plans. Think about it this way. You may have “bought” the stock market at 14,000, and 13,000 and 12,000 and 11,000. Now that it’s cheaper, should you stop buying it? One of the nice things about 529 plans is they let you set up a regularly monthly contribution. If you stick to your plan, that means you buy into the market every month. This allows you to dollar cost average your investments.
Although my time horizon is long, you need to evaluate your strategy if your kid is going to college soon. Many 529 plans offer time horizon funds which automatically switch some of your money into bonds and less risky investments when your kid gets closer to college. That way a sudden crash in the market, like what we’ve seen lately, won’t keep you from being able to pay for college.
Unless you think the market will continue on a downward trajectory from now until when your kid goes to college, it probably makes sense to stick to your plan and keep investing on a regular basis.
What better time than back-to-school time to think about saving for college. Congress passed a resolution back in 2003 to make September College Savings Month. It’s a time to reflect on your goals of saving for college. Have you set up a 529 plan? Are you contributing enough to the plan to meet your goals?
For more assistance setting up a 529 plan, be sure to visit the 529 plan guide.
529 plans are a great way to save money over the long term for your child’s education. But there’s a huge tax benefit for people who’s kids or grandkids are already in college or starting this fall. This loophole works for people who live in states with state income tax benefits on their 529 plans.
Here’s an example, as illustrated by the Charleston Post and Courier. Say you have a tuition bill due in a couple weeks for $10,000. You can contribute $10,000 today to your child’s 529 account, and then withdrawal it next week to pay the tuition bill. South Carolina’s 529 plan offers a state income tax deduction for contributions to a 529 plan, so you would be able to deduct $10,000 from your income on your state income tax return this year even though you only had the money in your 529 account for a week.
Many other states also have this loophole because there’s no waiting period for getting the deduction. Of course, this doesn’t have anything to do with federal tax benefits of 529 plans, so it only applies if you live in a state with a 529 plan offering upfront tax benefits with no waiting periods.
Saving for college and keeping up with contributions to 529 plans can be difficult, especially when times are tough. Here are five ways to keep up with your 529 plan and save more money for college.
1. Set up automatic payments. Most 529 plans encourage you to set up automatic deposit with your plan. For example, Utah will automatically debit your checking account each month on a date you set for a regular amount. Many states let you contribute as little as $15 per month.
2. Ask friends for help. Rather than having friends and relatives give gifts to your kid for his or her birthday, ask them to contribute to your kid’s 529 plan. One company makes that easier — FreshmanFund.com. Simply set up an account, let friends contribute to it, and the money is automatically sent to your 529 account.
3. Get your kid involved. By the time they enter middle school, most kids are starting to think about college. This is a good time to talk to them about the expenses of college and how you are prepared to help them. After discussing how much you are going to contribute and any gap that exists, challenge them to help make up the difference. You can even offer to “match” what they contribute to the account.
4. Take advantage of tax breaks. 529 plans offer great tax breaks. Not only do you avoid federal income taxes on your investment earnings, but many states offer deductions when you make your contribution. Investment earnings held outside 529 plans get hit by Uncle Sam before you use it to pay for college.
5. Start yesterday. If you haven’t set up a 529 plan yet, you need to start now. The earlier you start the more the “magic of compounding” will help you.