From cooking the Thanksgiving turkey to writing down your New Year’s resolutions, the end of the year is undoubtedly a hectic time. If you’re like me, you might be tempted to procrastinate, especially when it comes to long-term things, like 529 college savings plans. But year-end actually presents the opportune time to take just a few moments to set yourself up well. Below are some quick tips and reminders to keep you on track to meet your education savings goals.
Take advantage of any state tax benefits: Many states offer tax deductions for contributions made to a 529 plan account. If you have to pay state tax, be sure to research in which plans you can invest to take that deduction, and the amount of the deduction for the year. For more information, check out our state tax deduction calculator.
Make it a family affair: Anyone can contribute to a 529 plan, so if family or friends plan to give cash to your child for a birthday or holiday, consider having them deposit the funds into your child’s 529 account instead. Plus, each child can have multiple accounts set up for his or her benefit, so your friends or family could open separate accounts for your child in their own names and take advantage of any tax benefits themselves.
Strategize your drawdown: If you’re currently paying for college, take a look at Vanguard’s research for an efficient drawdown strategy. How you use your assets earmarked for college can affect your child’s financial aid eligibility and may also present various tax benefits or consequences. Additionally, don’t forget about the continued benefits you may receive for continuing to invest in your 529 plan while your child is attending college.
Keep your portfolio balanced: If you’re not using an age-based investment option in your 529 account, the end of the year is a great time to rebalance your portfolio to maintain your desired asset allocation. Keep in mind that you can perform two exchanges in your 529 account per calendar year. Also remember that if you exchange into new funds in your portfolio, you may need to update your contribution allocations to match your new portfolio allocation.
Maximize the annual gifting exclusion: Contributions to a 529 account are considered gifts and are subject to the gift tax rules; however, in 2016, individual contributions up to $14,000 per beneficiary (student) are exempt. This amount doubles to $28,000 per beneficiary for married couples filing jointly. Investors also have the ability to front-load their contributions to 529 accounts with five years’ worth of the gift tax exclusion amount. This means that individuals can contribute up to $70,000 and married couples can contribute up to $140,000 in one year and still take advantage of the exclusion as long as they don’t provide another gift to the beneficiary in the following five-year period.
Make sure to stay on top of contribution deadlines to fully take advantage of all the benefits available to you. In most cases, contribution checks must be postmarked by the last calendar day of the year, and online contributions, including automatic investment plan debits, should be processed on or before the last business day of the year. (Some states extend these deadlines, so follow the dates in your 529 plan’s disclosure booklet.) Finally, make sure to keep track of bills and receipts that show your withdrawals were used for qualified education expenses. A few moments of your time now can make a meaningful difference in meeting your education goals.
I’d like to thank Jenna McNamee of Vanguard Investment Strategy Group for her contributions to this blog.