529 Plans: Private Schools and College Savings Tax Hack

Derek Dorris

derek@vaultwealthstrategies.com
Planning
5
MIN READ

A 529 plan is one of many options that people have to save for college. It’s popular because if done right, a 529 plan can provide some nice tax benefits. Since 529 plans are state specific, it’s important to learn the details for your state. In this article, we will use Oklahoma as an example.  

Tax Benefits of 529 Plans

With a 529 plan, contributions in most states provide a state income tax deduction. In Oklahoma, the limit is $10,000 if you file a single tax return and $20,000 if you file a joint return with a spouse. 


The contributions that go into a 529 plan grow tax free from federal and state taxes if the distributions are used for qualified education expenses , including primary & secondary education (K-12). However, there is a limit on primary & secondary education expenses of $10,000 per year. 


Contributions up to $15,000 single/$30,000 married can be excluded from annual gift tax.  In fact, contributions up to $75,000 single/$150,000 married can be prorated over a 5 year period and still qualify for federal gift tax exclusion.


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529 plan contributions in most states provide a state income tax deduction
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Costs For A 529 Plan

Usually the costs for having a 529 plan are minimal. On the Oklahoma state 529 plan website, they break it down like this: If you had a $10,000 account for year 1 the cost would be roughly $37. If you kept that same account after year 3 this account would cost you $116. That is roughly a cost percentage of .37%. 

How hard is it to set up an account?

Setting up a plan is actually quite simple, and remember this is in regard to the Oklahoma 529 plan. Just go to ok4saving.org and create an account. The account opening process takes 15 minutes or less.

Who can contribute?

Are parents the only ones allowed to contribute to the account? No, a grandparent, uncle, or family friend are also allowed to contribute to the plan. As mentioned above, they are limited to the same $15,000 annual limit for the gift tax exclusion, and $10,000 per family member to qualify for the state income tax deduction. Though it is important to note that for the Oklahoma State 529 plan the maximum aggregate value of the 529 plan is $300,000, any more and the funds would be returned. 

529 Investment Options

The options for 529 plans have gotten better over the years. There are a few strategies to consider. Investors still have the traditional portfolio that makes automated changes as the child ages. Next you have the option that allows you to manually switch portfolios based on the investors risk tolerance, and finally for those investors that are completely risk averse you have the guaranteed option. 


One thing to keep in mind, no matter which approach you choose, is that you are only allowed two changes per year.


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There’s no rule for how long the money has to be sitting in the 529 plan before you can use the distribution to pay off qualified expenses.
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529 Plan Tax Hack 101

If you have not had a lot of discretionary money to invest in a 529 plan over the years, or quite frankly you just didn’t set one up, it is not too late to use the Oklahoma tax credit and the Oklahoma 529 plan to your advantage. You can simply open up an account, deposit the money you were going to pay to the college or acceptable institution into the 529 plan and then take a 529 distribution to pay the desired school.


To make the distribution you can either have the 529 plan mail your institution a check or simply link your banking information, deposit the money from your 529 plan into your banking account and write the check to the appropriate institution yourself. There’s no rule for how long the money has to be sitting in the 529 plan before you can use the distribution to pay off qualified expenses. 


Also, it is important to keep in mind, when you are attaching your banking information for deposits, there is roughly a 4 day hold, and setting up your banking information to take distributions requires at least a 30 day hold. So, if time is of the essence, you might have the 529 plan just send the check.

Tax Savings Example

Here is an example of the possible state income tax savings you might get utilizing this strategy.  Take a husband and wife who each contribute $10,000 each to their kids 529 plan for a total of $20,000.  Next multiply that $20,000 times 5% (5% is the Oklahoma flat state tax rate) for a total of state income tax savings of $1,000.  Multiply that by 4 and you would have saved yourself roughly $4,000 in state taxes over 4 years. It’s important to note that these tax savings only apply at the state level and do not pass through to your federal income taxes.


Is a 529 plan really the best solution for you and your situation? We can help. Schedule a free introductory call to find out how Vault helps clients integrate 529 plans into their holistic financial plan.

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