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Tax-Efficient Strategies to Maximize Savings Toward Future Education Expenses

Tax-Efficient Strategies to Maximize Savings Toward Future Education Expenses

May 23, 2024

Tax-Efficient Strategies to Maximize Savings Toward Future Education Expenses

Are you trying to save for a loved one’s education or looking to optimize your existing plans? Consider a tax-efficient strategy known as a 529 plan.

At JL Smith Holistic Wealth Management, we believe they are an effective tool to help maximize your savings toward future education expenses, all within your comprehensive financial plan.

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Named after Section 529 of the Internal Revenue Code, these plans offer significant tax benefits when funds are used for qualified educational expenses.

Types of 529 Plans

  1. Savings Plans: These are similar to retirement investment accounts, where contributions are invested in mutual funds or other investment products. The funds grow tax-free, and withdrawals for qualified education expenses are not taxed.
  2. Prepaid Tuition Plans: These plans allow you to prepay future tuition at today’s rates, which can be beneficial in states where tuition inflation is high. "Prepaid plans are basically state-covered plans that allow you to prepay for state public universities and colleges," noted Petev.

Tax Benefits and Strategic Gifting

A big draw of 529 plans is their tax benefits. Contributions grow tax-deferred, and withdrawals for qualified expenses are tax-free.

There are also tax benefits for people who are gifting in certain states and some states offer significant tax deductions or credits for contributions to their 529 plans.

From a gifting perspective, 529 plans offer unique advantages. Grandparents, for instance, can make large contributions without incurring gift taxes by leveraging the five-year election, which allows them to front-load up to five years’ worth of contributions.

For even more tax-efficiency, instead of grandparents contributing directly into the child’s 529, they can provide a cash gift to the parents. This allows them to contribute to the fund while benefiting from a state tax deduction, too.

The Role of Holistic Financial Advising

Navigating the complexities of 529 plans and maximizing their benefits can be made easier with professional guidance. This is where our holistic financial advisors at JL Smith Holistic Wealth Management come in. We look at your entire financial picture, integrating education savings with other financial goals and strategies.

Additional Strategies for College Savings

Besides 529 plans, Roth IRAs can also be a useful tool for college savings.

JL Smith lead advisor Seth Meisler says, “the earnings would not be subject to a 10 percent penalty if used for college contributions, and if you're over 59-and-a-half, there’s no tax on the earnings."

This dual-purpose tool can provide flexibility for both retirement and education funding.

The Importance of Professional Guidance

Saving for a child's or grandchild's college education can be daunting but utilizing 529 plans with the proper guidance and other strategic tools can make the process more manageable and tax efficient.

At JL Smith Holistic Wealth Management, we are committed to helping families achieve their financial goals through comprehensive and personalized planning. Working with one of our holistic financial advisors can help ensure that all aspects of your financial life are considered, helping you make more informed and effective planning decisions.  

For more detailed advice and strategies, consider consulting with one of our advisors. Schedule a complimentary consultation today to learn how we can help you secure a brighter future for your loved ones.