Are 529 Plans Tax Deductible in New Jersey?
What Are 529 Plans and Are They Tax Deductible in New Jersey?
By: Bill Lalor, CFP®, CFA
Many people’s thoughts turn to college this time of year as students across the country are heading back to school. More specifically, many parents are thinking about how to pay for their kids’ college educations.
Fortunately, the federal government offers a useful tool that can help you save for college and reap tax benefits at the same time. It’s called a 529 plan, named after the section of the Internal Revenue Code that authorizes these plans.
What is a 529 Plan?
529 plans are “qualified tuition plans” sponsored by states, state agencies and educational institutions. They were originally designed to help parents save money for college, but tax legislation enacted in 2017 expanded this to include up to $10,000 in annual expenses associated with kindergarten through 12th grade education. So, you can use a 529 plan to save money for private K-12 education as well as college if you want.
What Are the Tax Benefits?
The tax benefits of 529 plans are similar to those offered by qualified retirement plans like traditional IRAs and 401(k)s. Money held in the account grows tax-free, which can boost the account’s value significantly over the long term. And funds can also be withdrawn tax-free if they’re used to pay for qualified education expenses. These are defined broadly and include tuition and fees, room and board, textbooks, supplies and computers.
Tax Deductions for New Jersey Families
Unlike traditional IRAs and 401(k)s, 529 plan contributions are not tax deductible at the federal level. Thanks to recent legislation, however, you may now be able to deduct up to $10,000 of annual contributions you make to New Jersey’s 529 plan — the New Jersey Better Educational Savings Trust (NJBEST) — from your state income taxes. This deduction is available to New Jersey taxpayers with annual gross income of $200,000 or less.
The New Jersey College Affordability Act provides other educational benefits to New Jersey families as well. For example, taxpayers with up to $75,000 in annual gross income are eligible for a one-time grant of up to $750 as a dollar-for-dollar match of the initial NJBEST account deposit. And if beneficiaries enroll in a New Jersey college or university, they can apply for a $3,000 scholarship.
In addition, up to $2,500 in principal and interest paid on student loans under NJCLASS can be deducted on state income tax returns for taxpayers with up to $200,000 in annual gross income. And up to $10,000 in tuition costs can be deducted on state income tax returns if a student attends a New Jersey college or university.
Who Can Open a 529 Plan?
A 529 Plan account can be opened by almost anyone, as long as that person is 18 years old and a US resident. It is also not necessary for the account owner to be related to the account beneficiary. These plans are not just a savings tool for parents, they can be opened by grandparents, aunts, uncles, godparents, friends or even the student themselves.
Another key feature of 529 plans is that they are set up to accept third-party contributions, regardless of who owns the account. This means you don’t have to open a 529 account to help someone save for college. Anyone can contribute to an existing 529 plan setup for a beneficiary. An added benefit for making a 529 plan contribution is that most states currently offer a state income tax deduction or tax credit. However, in most cases, to get the tax benefit the account must be set up in the taxpayers home state’s 529 plan.
Why Choose a 529 Plan
Tax-free growth makes it advantageous to open and start funding a 529 account as early as possible. There are no annual contribution limits with 529 plans like there are with qualified retirement plans but there are aggregate contribution limits. However, these are very high — the aggregate 529 contribution limit in New Jersey is $305,000.
Note that 529 plan contributions of $16,000 per year (or $32,000 for married couples filing jointly) or less qualify for the annual federal gift tax exclusion. Under special rules for 529 plans, a lump-sum contribution of up to five times this amount — $80,000 or $160,000 for married couples filing jointly — will also qualify for the gift tax exclusion, provided you make the election on the federal gift tax form.
Additional benefits of using a 529 plan to save for college include:
- As the parent and owner of the account, you will retain control of assets in the account. This includes making all investment and distribution decisions.
- The beneficiary can be changed after the account is opened, if necessary. So, if the child you’re saving for decides not to go to college or earns scholarships and doesn’t need the money, you can use the funds for another child.
- Once money is contributed to the plan, it is considered a completed gift and no longer part of your taxable estate.
Note that if 529 plan funds are used for any purpose other than qualified education expenses, the earnings will be taxed at ordinary income rates and a 10% penalty will be assessed. Also, 529 plan assets could impact a student’s ability to receive financial aid.
All non-retirement assets (including money in a 529 plan) must be reported on the FAFSA financial aid application. They are assessed at a maximum rate of 5.64% in determining a student’s Expected Family Contribution (EFC). However, if the account is owned by a grandparent, the assets will not affect the student’s EFC.
How a Financial Advisor Can Help
A 529 plan can be a great education savings tool, but it should be incorporated into your overall financial plan. A Simon Quick advisor can help you devise the right college savings plan for your family. To learn more, call us at (973) 525-1000 or send an email to firstname.lastname@example.org.
About Bill Lalor
Mr. Lalor serves as the Head of Financial Planning where he employs his extensive experience to oversee the firm’s financial planning services. He is based in our Morristown, NJ office. His expertise includes tax, retirement, and cash flow planning, as well as executive compensation. He also manages some of the firm’s family relationships, endowments, and foundations. Mr. Lalor earned an MBA with a finance concentration from Rutgers Business School. He graduated with a BS from Rutgers School of Engineering where he majored in Ceramic and Materials Engineering. Mr. Lalor became a CERTIFIED FINANCIAL PLANNER™ practitioner in January 2007 after completing Fairleigh Dickinson University’s Program for Financial Planners in 2006. He completed his Chartered Financial Analyst (CFA) designation in 2014. To learn more about Bill visit his LinkedIn.
This information is for general and educational purposes only. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Simon Quick Advisors & Co., LLC (“Simon Quick”) nor should this be construed as an offer to sell or the solicitation of an offer to purchase an interest in a security or separate accounts of any type. Asset Allocation and diversifying asset classes may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Investing in Liquid and Illiquid Alternative Investments may not be suitable for all investors and involves a high degree of risk. Many Alternative Investments are highly illiquid, meaning that you may not be able to sell your investment when you wish. Risk of Alternative Investments can vary based on the underlying strategies used.Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Simon Quick), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Simon Quick is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. If you are a Simon Quick client, please remember to contact Simon Quick, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Simon Quick Advisors, LLC (Simon Quick) is an SEC registered investment adviser with a principal place of business in Morristown, NJ. Simon Quick may only transact business in states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of our written disclosure brochure discussing our advisory services and fees is available upon request. References to Simon Quick as being "registered" does not imply a certain level of education or expertise.This newsletter and the accompanying discussion include forward-looking statements. All statements that are not historical facts are forward-looking statements, including any statements that relate to future market conditions, results, operations, strategies or other future conditions or developments and any statements regarding objectives, opportunities, positioning or prospects. Forward-looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties and contingencies. Forward-looking statements are not a promise or guaranty about future events.Economic, index, and performance information herein has been obtained from various third party sources. While we believe the source to be accurate and reliable, Simon Quick has not independently verified the accuracy of information. In addition, Simon Quick makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third parties.Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or benchmark index, as comparative indices or benchmark index may be more or less volatile than your account holdings. You cannot invest directly in an index.Indices included in this report are for purposes of comparing your returns to the returns on a broad-based index of securities most comparable to the types of securities held in your account(s). Although your account(s) invest in securities that are generally similar in type to the related indices, the particular issuers, industry segments, geographic regions, and weighting of investments in your account do not necessarily track the index. The indices assume reinvestment of dividends and do not reflect deduction of any fees or expenses.Please note: Indices are frequently updated and the returns on any given day may differ from those presented in this document. Index data and other information contained herein is supplied from various sources and is believed to be accurate but Simon Quick has not independently verified the accuracy of this information.