Garden State residents usually have questions about the New Jersey 529 plan. In this blog we’ll talk about what it is, its salient features, and the pros and cons.
Before we get started, you may want to check out other New Jersey finance blogs we’ve written:
A checklist for moving to Morristown, NJ from NYC
What is the average income in New Jersey?
The New Jersey 529 plan is a managed investment account that you can use to fund your child’s education. Although many New Jerseyans use it, you may use the plan whether or not you reside in the state. The New Jersey plan’s official name is NJBest.
The owner of the account controls how the assets are managed and what they are eventually used for.
Yes, you can breathe a sigh of relief.
Your teenager will not be given control of the hard-earned money you diligently socked away into a New Jersey 529 account!
New Jersey 529 contribution limits
Contributions grow Federal tax-free, and they may be used to fund qualified tuition expenses at most qualifying institutions such as college, universities, vocational schools, and apprenticeships.
- You can contribute up to $305,000 total per beneficiary into a New Jersey 529 plan account.
- You can gift up to five years of contributions ($80,000 for individuals and $160,000 for married couples) and not be on the hook to pay Federal gift tax, as long as certain conditions are met.
Many folks are unaware that amounts contributed to this plan may be used to fund expenses other than tuition! You may use funds to pay for:
- Supplies
- Books
- Room and board (if enrolled more than half time)
- Student loans for the beneficiary or a sibling (up to $10,000)
But what if you establish an account for a child who eventually winds up not pursuing higher education? The good news is that ownership can be transferred to an immediate or extended family member.
Also, under the New Jersey College Affordability Act, if you earn $75,000 or less a year, you may be eligible for up to $750 given as a matching grant for amounts you have contributed to your NJBest 529 plan.
New Jersey 529 tax deduction
If you earn less than $200,00 per year, you are eligible for a tax deduction for contributions of up to $10,000. This feature starts in 2022.
But wait – that’s not the only tax benefit you are allowed as a participant in the New Jersey state sponsored 529 plan! As mentioned, your earnings grow Federal tax-free.
How to select a good 529 plan
Before we get into the pros and cons of the New Jersey 529 plan, here is some general guidance about how to pick a good college funding option for a child.
Here’s what to look for.
Reasonable fees
Most 529 plans charge an administrative fee for use of the platform. In addition, there are investment options to choose from, each having different fees associated with them. We would urge you to be wary of investments that come with a fee of 1% or higher. Generally, passively managed index funds are lower cost than actively managed mutual funds or Target Date Funds, which adjust over time as the child gets closer to college.
As fees are stated in percentage terms, it’s useful to do the math and compute the hard dollar amount. For example, 0.75% investment fees may not seem like a big number, but if you’ve got $50,000 in the plan, you’re paying $375 a year just for holding that fund. Look at the actual dollar amount and then assess if there are better options available for less money.
Flexible distribution terms
529 plans differ in terms of what type of educational pursuits the proceeds can fund. Look for flexibility here, as children may wind up going in a different direction than originally imagined.
Tax deductions
Most 529 plans offer a state income tax break in the year you contributed; the size of the break varies.
Ease of access
The technology platform that houses the 529 plan should be easy to access, providing a simple process for such actions as downloading statements, accessing transaction confirmations, setting up automatic investments, making contributions, and accessing help if needed.
Reasonable contribution limits
Plans differ in terms of how much you can contribute on a yearly basis and over the life of the account. Be sure to gauge your preferences versus what the plan will allow.
Pros and Cons
Let’s talk about who the NJBest plan may work well for, and who is may not be so well-suited for.
Before we get into this part of the discussion, please keep in mind that we are not making any recommendations specific to any one individual. All statements are general in nature. If you would like suggestions that are specific to your situation, please consult with a financial advisor.
And now onto the discussion…
As there is a $200,000 income limit, high earners making over this amount are excluded from the tax deduction. Suppose you were a family of four earning less than that, though, contributing $10,000 to the plan per year. This would equate to a roughly $637 cut off your tax bill for the year in which you made the contributions.
Unlike in years past, New Jersey families participating in the New Jersey 529 plan would get the chance to receive a tax break, as described above, as long as certain conditions are met. Let’s put that in the “pro” category.
Now for a “con.” The New Jersey 529 is somewhat expensive relative to other state 529 plans. This is because the investment options that are presented have a higher cost associated with them than many other less expensive state 529 plans.
It makes sense to consider the overall goal. If you are tax sensitive, this may be a good option to consider. If you are fee sensitive, it may not be.
Final thoughts
Saving for college is a gargantuan task, especially if you have multiple children and/or a complicated financial situation. As financial advisors in Morristown, NJ, serving clients across the country, we encourage you contact us if you wish to discuss your personal financial situation.
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Sources
NJ BEST. New Jersey’s 529 College Savings Plan. https://www.njbest.com/
NJBEST Benefits. https://www.njbest.com/why-njbest/njbest-benefits