What is a s529 Plan?
- August 25, 2021
- Posted by: Hansen_Sweeney
- Categories: News, Tax
A 529 plan is a US tax efficient savings plan (aka qualified tuition plan) designed to help families to save for their child’s higher education.
These plans must be set up under a qualified trust in the US so they meet the qualified higher education expenses of the designated beneficiary of the account.
As a parent saving via this plan, you would be considered the account owner and settlor of the trust who has control of the investments and your child would be the sole beneficiary.
What are the benefits of a s529 plan?
Primarily, in the US such plans benefit from tax-free growth of the underlying investments. Many US states also offer tax benefits for contributions into a 529 plan if you are resident in that particular state. Earnings in the 529 account are not subject to federal income tax and, in many cases, state income tax, if used for qualified higher education expenses or tuition for elementary or secondary schools.
Many foreign (non-US) universities are also considered to be qualified educational institutions for this purpose, so these plans are popular with US persons living in the UK and there are no penalties for distributions to such universities for the purposes of qualified higher education for the beneficiary. However, if 529 account withdrawals are not used for the purposes of qualified higher education for the beneficiary, they will be subject to state and federal income taxes and an additional 10% federal tax penalty on the earnings portion (unless the beneficiary is disabled or dies).
But what are the additional tax implications for US persons residing in the UK?
From a US estate tax perspective this is pretty clear, the owner of the account is considered the beneficiary, so the trust is not part of the estate of the settlor (i.e. the person who made the contribution into the plan). However care should be taken to avoid making contributions into the plan that exceed the $15,000 annual exemption ($30,000 if jointly made with your spouse) because this could trigger the need to file a gift tax return. This would be true irrespective of residence in the UK.
From a UK tax perspective this is not so clear. The 529 plan could be considered a ‘look through’ investment account (taxable on the owner) or it may be considered a trust. Either way there are important UK tax consequences to consider and it is important to consult a professional US/UK tax advisor to ensure the correct treatment.