Morgan Stanley
  • Wealth Management
  • Nov 11, 2020

Give the Gift of Education Savings This Holiday Season

Looking for a more meaningful gift this holiday season? Consider giving your children or grandchildren the gift of learning—through a 529 plan.

It should come as no surprise that a college education is expensive, with costs steadily rising. The College Board—a nonprofit educational association—reports that for the 2019-2020 academic year, the average tuition, fees, room and board, books and supplies, transportation and other expenses for a four-year private college is $53,980 per year ($26,590 for a public in-state institution).1

Named after Section 529 of the Internal Revenue Code, a 529 plan is a tax-advantaged way to invest, or even pay in advance, for education expenses.

There are various advantages of investing for future education expenses in a 529 plan. Earnings in a 529 plan generally grow tax-deferred, and withdrawals are generally exempt from federal and state income taxes if you use the funds for qualified expenses such as tuition, fees, room and board, and supplies.2 Many states also offer a state income tax deduction or credit for your contributions.

Manage your Wealth

Find a Financial Advisor, Branch and Private Wealth Advisor near you

Potential Gift Tax Benefits and Accelerated Contributions

529 plans offer an opportunity to gift potentially significant amounts from your estate while still retaining control of the assets and withdrawals as the account owner. For tax planning purposes, your 529 plan contribution is considered a completed gift to the beneficiary and generally qualifies for the annual gift tax exclusion of $15,000 for 2020 ($30,000 for married couples), enabling you to make contributions without being subject to the federal gift tax.

Additionally, you can front-load your contribution to as much as $75,000 in one year per beneficiary ($150,000 for married couples) and elect to take that front-loaded contribution into account for purposes of the annual gift tax exclusion over a five-year period.3 The five-year gifting election is a feature unique to 529 plans and increases the time that assets can potentially grow tax-free, boosting the potential magnitude of the gifts. 

If you have the means, you can even take advantage of six-year gift tax averaging. To do this, you can contribute one year’s worth of gifts in December, followed by five years of contributions in January, effectively making six years’ worth of contributions in just two months.

Furthermore, beyond the annual gift tax exclusion, any part of the Unified Lifetime Gift Tax Exemption, currently at $11.58 million per individual, can be used toward funding a 529 plan. With potential tax code changes and uncertainty around what will happen to this exclusion in 2021, now may be a good time to consider contributing funds to a 529 plan, which may have contribution limits as high as $500,000 per beneficiary.

Gifting a Required Minimum Distribution

If you are taking required minimum distributions from a tax-qualified retirement plan or account but don’t need the funds for everyday expenses, consider using those distributions to fund a 529 plan for grandchildren or other family members.

While your distribution will be subject to tax, once you invest the funds in a 529 plan they can generally grow tax-free. Also, any withdrawal used for qualified education expenses will typically be tax-free as well. For large distributions from your tax-qualified retirement plan or account, you can take advantage of the accelerated gifting feature described above. Please note that non-qualifying distributions of earnings from a 529 plan are subject to ordinary income tax and may be subject to a 10% penalty tax (unless an exception applies).

Broad Flexibility With Investing for Education

A key benefit of 529 plans is their flexibility. Some investment vehicles that are used for education funding require that the assets be given to the beneficiary when they reach a certain age. With a 529 plan, the owner of the account continues to make all of the decisions. For example, if the beneficiary decides not to go to college, you can choose a different beneficiary or use the plan for your own education needs. And while some education investment vehicles have age restrictions, a 529 plan has none.

Further, the definition of qualified education expenses for federal income tax purposes has expanded to include tuition for K-12 schools, as a result of the Tax Cuts and Jobs Act of 2017. Note that qualified withdrawals for eligible K-12 tuition are limited to $10,000 per beneficiary per year. Additionally, under the Setting Every Community Up for Retirement Enhancement Act of 2019, qualified education expenses for federal income tax purposes include (a) up to $10,000 used to repay qualified student loans; and (b) certain costs for qualifying apprenticeship programs. The state income tax treatment will vary by state. 2

Refine Your Financial Plan for the New Year

Make the arrival of the new year an occasion to revisit your financial plan and ensure your education funding strategy is on track. A 529 plan is a convenient, flexible and tax-advantaged way to invest for future education expenses. Morgan Stanley offers a variety of investment options, including the Morgan Stanley National Advisory 529 Plan—a first-of-its-kind advisory 529 plan that enables you to benefit from fiduciary oversight of your education funding strategy within the context of your broader portfolio and life goals.4 If you have questions or need more information about 529 plans available through Morgan Stanley, contact your Financial Advisor or Private Wealth Advisor today.

Footnotes:

1. The College Board: Trends in College Pricing 2019. “Published Tuition and Fees and Room and Board.”

2. Assets in a 529 plan potentially grow on a tax-deferred basis and can generally be withdrawn federal income tax-free only if they are used to pay for qualified education expenses. Qualified expenses include tuition, fees, room and board, books and supplies at virtually any accredited post-secondary school. Effective for distributions made on or after January 1, 2018, the definition of qualified education expenses for federal income tax purposes expanded to include tuition for K-12 schools as a result of the 2017 Tax Cuts and Jobs Act. The new tax law limits qualified 529 withdrawals for eligible K-12 tuition to $10,000 per beneficiary per year. Effective for distributions made on or after January 1, 2019, the definition of qualified higher education expenses for federal income tax purposes was expanded to include certain costs associated with qualifying apprenticeship programs and up to $10,000 (lifetime limit per individual) in amounts paid towards qualified student loans of the 529 plan designated beneficiary (or such beneficiary’s sibling). Note, however, that using 529 plan distributions to repay qualified student loans may impact the deductibility of student loan interest. The state tax treatment of 529 plans (including the state tax treatment of distributions) may be different from the federal tax treatment and may vary based on the particular 529 plan in which you participate and your state of residence. If the applicable state tax law does not conform with the federal tax law, 529 plan distributions used to pay certain expenses, such as K-12 tuition expenses, principal and interest on qualified student loans and/or qualifying apprenticeship costs, may not be considered qualified expenses for state tax purposes and may result in adverse state tax consequences to the account owner or designated beneficiary. Non-qualified distributions of earnings will be subject to ordinary income tax and may be subject to a 10% federal income tax penalty. Many states allow a partial or full state income tax deduction or credit for contributions to a 529 plan, but may limit the availability of such credit or deduction to only those contributions made to that state’s sponsored 529 plan.

3. As of 2020, the annual gift tax exclusion is $15,000 for individuals, and double for married couples at $30,000 annually or $150,000 over a five-year period. An election to do so must be made on a gift tax return for the year of the gift. This assumes there are no frontloaded 529 contributions made by the gift giver for the benefit of the same individual during the prior four years. Any frontloaded 529 contributions made for the benefit of the same individual during the four years prior to the year of the frontloaded contribution may result in a taxable gift. Additionally, any gifts to the same individual during the year of the frontloaded 529 contribution or the four years after the frontloaded 529 contribution is made may result in a taxable gift. If the donor dies within five years of making the frontloaded 529 contribution, the estate will generally recapture a portion of the assets for federal estate tax purposes.

4. The North Carolina State Education Assistance Authority (the "Authority") is an instrumentality of the State of North Carolina sponsoring the Morgan Stanley National Advisory 529 Plan, and the 529 Plan is a component of the Parental Savings Trust Fund established by the General Assembly of North Carolina. Neither the Authority, the State of North Carolina nor any other affiliated public entity or any other public entity is guaranteeing the principal or earnings in any account. Contributions or accounts may lose value and nothing stated herein, in the 529 Plan Description and Participation Agreement, or any other account documentation shall be construed to create any obligation of the Authority, the North Carolina State Treasurer, the State of North Carolina, or any agency or instrumentality of the State of North Carolina to guarantee for the benefit of any parent, other interested party, or designated beneficiary the rate of return or other return for any contribution to the Parental Savings Trust Fund and the 529 Plan.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”) is the manager of the 529 Plan and is responsible for its administration, distribution and investment management.  Morgan Stanley does not provide tax and/or legal advice to investors in the 529 Plan. Investors should consult their personal tax advisor for tax-related matters and their attorney for legal matters. For more information please see the applicable Morgan Stanley ADV brochure at www.ms.com/adv.

The Morgan Stanley National Advisory 529 Plan is a proprietary offering available exclusively to Morgan Stanley advisory account clients. The Plan is not transferable to other intermediaries.

IMPORTANT DISCLOSURES

The 529 Plan Description contains more information on investment options, risk factors, fees and expenses, and potential tax consequences, which should be carefully considered before investing.  Investors can obtain a 529 Plan Description from their Financial Advisor and should read it carefully before investing.

 

Investments in the 529 Plan are not FDIC-insured, nor are they deposits or guaranteed by a bank or any other entity, so an individual may lose money through such investments.

Investors should consider many factors before deciding which 529 plan is appropriate. Some of these factors include:  the plan’s investment options and the historical investment performance of these options, the plan’s flexibility and features, the reputation and expertise of the plan’s investment manager, plan contribution limits and the federal and state tax benefits associated with an investment in the plan.  Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state’s own qualified tuition program. Investors should determine their home state’s tax treatment of 529 plans when considering whether to choose an in-state or out-of-state plan.  Investors should consult with their tax or legal advisor before investing in any 529 plan, or contact their state tax division for more information. 

© 2020 Morgan Stanley Smith Barney LLC. Member SIPC. All rights reserved.

CRC# 3321828 (11/2020)

View disclosures

Ready to Start Planning for College Costs?

Find a Financial Advisor Near You.

Filter by investment need, ZIP code or view all Financial advisors.

Check the background of Our Firm and Investment Professionals on FINRA's Broker/Check.