Finally! A state income tax benefit* for those who contribute to New Jersey’s 529 Plan, “NJBEST”. (*Certain income limits apply)
This potential tax benefit does come with some tradeoffs, however, so some due diligence is necessary. As most may know, a 529 plan is a tax-free way to save for expected future education costs – tuition, room/board & other “required” costs. We cover these at length at the end of this blog…
Much like any other brokerage account, you open a 529 account with a plan provider/custodian, fund the account and invest the contributions. Your account will (hopefully!) grow over time and the balance can be used down the road for the beneficiary’s “qualified education expenses”. If done correctly, the withdrawals of a 529 plan used to cover education expenses will NOT be subject to income taxes on any of the investment gains.
Why are we writing about this now? Income taxes. Who doesn’t like to save on the income taxes they pay? Up until recently, New Jersey did NOT allow a state income tax deduction for contributions to the NJBEST 529 plan. But that has changed, and now: New Jersey taxpayers with a gross income of $200,000 or less can qualify for a state income tax deduction of up to $10,000 per taxpayer for contributions to the plan. For a married couple who files a joint return that is up to a $20,000 state income tax deduction.
This state income tax deduction is certainly a welcome change, but there are other things that should be considered before using the NJBEST plan as your go-to provider. For example, investment options and plan fees are two big factors when choosing a 529 plan. And unfortunately, (as ranked by www.savingforcollege.com) the plan fees for the NJBEST Plan are significantly higher than some of the other lower cost plans.
Additionally, in comparison to other 529 plans, the NJBEST investment offering is somewhat limited. When looking at 529 plan investment options, you should make sure that the plan offers a diverse set of investment options to cover the various asset classes; these options should include both index and active investment options. Again, unfortunately, the NJBEST Plan is lacking in this area.
So, what are your options when considering the NJBEST Plan?
- If your income exceeds $200K, you won’t qualify for a state income tax deduction. However, it still might make sense to save for college via a 529 plan that has a broad set of investment options and lower expenses.
- If your income is under $200K, you may want to consider making an initial contribution to the NJBEST plan (…which will allow you to receive the state income tax deduction), but then rollover the balance to a plan with lower costs & better investment options.
A few additional thoughts…
If you don’t end up using the entire 529 balance on the account’s beneficiary, you have a couple of options.
- You can change the beneficiary to a sibling or another family member to use for their costs; the plan is transferrable.
- You can now rollover up to $35,000 from a 529 into a Roth IRA for the same beneficiary. This new rollover option is a result of the SECURE Act 2.0 which states that the 529 account must have been open for more than 15 years to qualify. Additionally, this rollover is subject to earned income requirements, annual contribution limits and income limits.
Separately, 529s are also an inexpensive estate planning method as assets in this account are removed from the estate of the parent or grandparent who funded the account even though that individual still controls the account.
Finally, 529s allow an individual (e.g., parent or grandparent) to contribute up to $85,000 in one year (using the 5-year annual gift exclusion election) to a 529 account, which allows the account owner to get funds invested right away and allow more time for growth.
Summary of Qualified Education Expenses… You can spend the 529 assets on tuition and fees, books and supplies, computer, software, internet access, room & board, student loans (up to $10,000) & special needs equipment . You can also use up to $10,000 a year on K-12 tuition costs.
NOTE: If you are saving for a beneficiary with special needs, it will make sense to look into a 529 ABLE account given the ability to use funds in this type of account for disability expenses.
As with most financial matters, education funding requires thought and analysis given the specific goals that you may have.
Please feel free to reach out to us with any questions.
All the best,
NCM Capital Management
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. 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 any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.