Contributor: Kristen Fricks-Roman
Company: Morgan Stanley Wealth Management
Title: Financial Advisor
You’ve likely heard the “Twelve Days of Christmas,” where “my true love gave to me” many gifts of the season. It’s certainly a fun song to sing with family and friends, but have you ever thought about how expensive it would be to buy all those gifts? According to the Christmas Price Index, the 2018 cost of gifts mentioned in the iconic song would be more than $170,000, if you count each separately (364 gifts in all).
Since that figure is far beyond our holiday budget for most of us, consider giving a gift to a child you love that’s inspired by select numbers in the song: five gold rings, two turtle doves and nine ladies dancing. If you think those numbers might refer to a 529 education savings plan, you’d be correct. It’s a tax-advantaged vehicle to save, or even pay in advance, for education expenses.
To help get you inspired, here are four calling birds — or reasons to give the gift of education savings.
Lend a helping hand. The College Board reports that for the 2017-18 academic year, the average cost of tuition, fees, room and board, books and supplies for a four-year private college is $46,950 per year ($20,770 for a public, in-state institution). Contributing to a 529 education savings plan for a student’s future is a smart way to ease the burden of skyrocketing higher education costs. It also helps them avoid the pain of the high student loan debt that they could face after graduation. Like saving toward any long-term goal, investing even small amounts each year can add up by the time a young child is ready to go to college.
Maintain flexibility and control. Anyone can open or contribute to a 529 plan, and the beneficiary can be anyone the account owner chooses — a child, grandchild, niece or nephew, spouse or even yourself (you can use a 529 account to cover your own higher education expenses). And, you can change the beneficiary at any time. For example, if the child you have been saving for wins a scholarship, you can transfer those 529 funds to another child. As the account owner, you retain control over the assets in a 529 plan.
Pay for K-12 tuition. As a result of the Tax Cuts and Jobs Act of 2017, the definition of qualified education expenses has recently expanded to include tuition for K-12 schools. Now, you can make federal-tax-free qualified withdrawals from 529 plans to help cover the cost of tuition at an elementary or secondary public, private or religious school. The limit is $10,000 per year per student. If you’re considering making a 529 plan withdrawal to pay for elementary or secondary school expenses, be sure to check with a tax professional first. They can help you determine how doing so may impact your state taxes.
Give a “gift.” According to the federal tax code, 529 plan contributions are treated as gifts. That means you can give up to $15,000 per beneficiary, or $30,000 for couples filing jointly, which might reduce your tax liability. It’s also possible to do five years of gifting in one year — up to $75,000 per beneficiary, or $150,000 for couples filing jointly. This is known as an accelerated gift. For planning purposes, it may be helpful to know that assets held in a 529 plan are not considered part of your taxable estate.
It may indeed be the most wonderful time of the year, as another song shares with us, which fosters the spirit of giving. As you consider what you’ll give, perhaps you’ll find that the gift of learning — through a 529 education savings plan — will be more memorable and beneficial over a lifetime than a gadget or toy that will eventually (and probably sooner rather than later) lose its value.
Kristen Fricks-Roman is a Financial Advisor with the Wealth Management Division of Morgan Stanley in Atlanta. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. If an Account Owner or the Beneficiary resides in or pays income taxes to a state that offers its own 529 college savings or pre-paid tuition plan (an “In-State Plan”), that state may offer state or local tax benefits, but only for participation in the In-State Plan. These tax benefits may include deductible contributions, deferral of taxes on earnings and/or tax-free withdrawals. In addition, some states waive or discount fees or offer other benefits for state residents or taxpayers who participate in the In-State Plan. An Account Owner may be denied any or all state or local tax benefits or expense reductions by investing in another state’s plan (an “Out-of-State Plan”). In addition, an account owner’s state or locality may seek to recover the value of tax benefits (by assessing income or penalty taxes) should an Account Owner roll over or transfer assets from an In-State Plan to an Out-of-State Plan. While state and local tax consequences and plan expenses are not the only factors to consider when investing in a 529 plan, they are important to an Account Owner’s investment return and should be taken into account when selecting a 529 plan. Tax laws are complex and are subject to change. This information is based upon current tax rules in effect at the time this was written. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates, Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should always check with their tax or legal advisor before engaging in any transaction involving 529 plans, Education Savings Accounts and other tax-advantaged investments.
Investments in a 529 plan are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so an individual may lose money. The 529 Plan Program Disclosure contains more information on investment options, risk factors, fees and expenses, and possible tax consequences. Investors can obtain the 529 Plan Program Disclosure from their Financial Advisor and should read it carefully before investing. Morgan Stanley Smith Barney, LLC, member SIPC. CRC 2345529 12/18