Paying for education: 529 plans

0:00- [Instructor] So let's discuss 529 plans, which are a very powerful way to save for college. And the reason why it's powerful is you can have money sitting in a 529 plan and growing and gaining income. And then when you take it out to pay for qualified expenses like college tuition or college room and board or college textbooks, you don't have to pay taxes on those gains that you have.

0:29So just to be clear, let's say that you get some income or someone that you care about has some income and like always there's going to be some that's taken for tax at the federal, and oftentimes the state level as well, sometimes even local level. And then you have your after tax income, after tax income.

0:51Now, the money that you're putting into a 529 plan has to be after tax income. So let's say you put that into a 529 plan, 529 plan, and let's say that in year one and the year you're doing it, you put $10,000 into that 529 plan. Now you're gonna have to name who it's for.

1:13You could say, "Okay, this is for this child. I am placing $10,000 into it." Now, let's say we fast forward, I don't know, five, 10 years when it is time for that student to go to college. That $10,000, let's say, has grown into $30,000. If this was just money in a traditional investment account, if it grew from 10 to $30,000, you would have to pay taxes on those gains at minimum capital gains tax.

1:42But depending on whether you're holding things for less than a year or not, you might even have to pay some income tax on it. But the benefit of a 529 plan is that this can be used directly without paying taxes for tuition. Tuition, things like books and fees, things like room and board things that are directly related to higher education.

2:05But also certain training programs can work. Different states, which are really the folks that administer the 529 or set the rules for 529s in different states. They might have rules about whether you can use it for private school, high school tuition, things like that.

2:21They have different rules on that. But generally speaking, higher education, you can use it for all of these things. Now, depending on the state, there could also be other benefits. For example, in the state of Virginia, not only can you put this money in and it can grow and you don't have to pay taxes on how much it grew, but some amount of this, at the time of this video, it's $4,000 you can actually deduct from your state income tax.

2:45So that $4,000, it doesn't mean you're paying 4,000 less in state income. It means that for the purposes of paying your state income, your income gets to be reduced by 4,000. So not the entire 10,000 in this case, but some, and just an example, if instead of doing this, you had just put it into a traditional investment account.

3:04So if you put $10,000 there and then it grew to $30,000, and then you wanna use it to pay for tuition, room and board and things like that, you are going to have to pay taxes on that before you can use all of this. And at minimum, we're talking about capital gain tax, but it could even in certain cases, be income tax.

3:25So this is a really good thing to do, assuming you know that you're going to use it for these qualified expenses. Now, there are limits to how much money you can put in. It depends from state to state. Depending on the state. There's a total limit per beneficiary, depending on the state, roughly in the 200 K to 600 K, a little less than 600 K range.

3:51So approximately 500 K range, it's different from every state. In California and Virginia, it's over $500,000 and that is per contributor, per beneficiary. Now, you also have to think when you're giving something to someone, you might say, "Hey, does the gift tax come into effect?"

4:09Well, at the time of making this video for each contributor per beneficiary, you can do $18,000. You can contribute $18,000 per year without triggering any gift tax. So that's pretty significant. If there's two parents say, contributing 18,000 each per child, that's $36,000.

4:29Now of course you have to save that amount of money. That's not a small proposition, but there's a lot of money that you can contribute now and then let it grow and then not have to pay taxes on that growth, which is a very good benefit.