Oct
01
2024

What Is Escrow & How Does It Work?

By | Home Ownership, mortgage | Comments Off on What Is Escrow & How Does It Work?

Escrow isn’t the most euphonious word, but it’s important when you’re a homebuyer and homeowner. In real estate transactions, escrow is the process of keeping money in trust until certain conditions are met. There are a couple different ways that escrow might be used, so let’s look more closely at this important process.

Key Points

•   Escrow involves a neutral third party holding money and documents during the home sale process to ensure both parties meet agreed terms.

•   During home buying, the buyer’s earnest money is held in escrow until the sale is finalized.

•   Post-purchase, escrow accounts help mortgage lenders ensure timely payment of property taxes and insurance.

•   Escrow protects buyers, sellers, and lenders.

•   Escrow costs typically range from 1% to 2% of the home’s sale price, varying by location.

What Is Escrow?

There are a couple of ways that escrow is used. The first time you might encounter it is during the home-buying process, when your good-faith deposit (also known as “earnest money”) is held in escrow until the sale is finalized.

The funds are kept in the care of an escrow agent, who ensures that the deal terms are met by both sides. This protects both the buyer and the seller during the homebuying journey, which can sometimes be bumpy.

After you purchase a home, an escrow account is often used again as a way to help the mortgage lender ensure that an owner pays property taxes and home insurance fees in a timely and consistent fashion (more on that later). In this scenario, your mortgage loan payments will include taxes and insurance. An escrow account set up by the lender or mortgage servicer will accrue that portion of your monthly payment and pay the tax and insurance bills when they’re due.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

When you make an offer on a home and the seller accepts it, you’ll typically submit some earnest money. This good-faith deposit shows the seller that you are serious about buying the property. Once the seller accepts your offer, the buyer’s or seller’s agent opens an escrow account with an escrow provider, often a title company. The earnest money, as well as the purchase agreement, the seller’s deed, and other documents are held there in escrow until the sale is final.

The earnest money deposit (typically 1% to 3% of the purchase price, though it can be more in a hot market) is verified by the escrow agent, and evidence is sent to the lender in writing.

Buyers who minimize contingencies in their purchase agreement risk forfeiting their earnest money deposit.

Common contingencies include the mortgage contingency, which allows either party to walk away from the deal if the buyers are unable to secure financing by the agreed-upon deadline, and the sale of current home contingency, when buyers need the proceeds from the sale of their existing home to afford the new home.

Others are appraisal and home inspection contingencies. These will all be written into the purchase contract.

As the process moves forward, the escrow agent is responsible for ordering a title search, and tracking and verifying the items laid out in the escrow instructions for the home sale.

The earnest money deposit is held in escrow and when the sale goes through it is used toward the down payment and closing costs.

Sometimes, funds are held in escrow beyond the closing. When this happens, it’s called an escrow holdback. It might occur if, for example, you and the seller make an arrangement that allows the seller to stay in the house for a month after the closing. Money would be held in escrow to pay the seller’s final utility bills. Or perhaps the seller has agreed to make a repair to the home but the work is not completed at the time of closing. Funds might be held in escrow to cover the cost until the repair is made.

What’s the Benefit of Escrow?

Escrow is designed to protect the buyer, seller, and lender until the transaction is complete. Having a neutral third party handle the paperwork and transfer of funds can benefit all parties in a real estate sale.

Escrow is required when you obtain financing, but it is used in cash sales as well. As a buyer, it can be comforting to know that all the transaction details are being handled by the appropriate parties.

As a seller, escrow provides a safeguard if anything goes wrong with the sale. For example, if the borrower backs out of the sale and breaks terms of the contract, the earnest money deposit may be forfeited by the buyer.

Recommended: Selling a House With a Mortgage

How Much Does Escrow Cost?

Escrow companies usually charge a base fee plus a percentage of the purchase price. That typically comes to 1% to 2% of a home’s sale price, but the cost varies by state and county.

For a $400,000 house, an escrow charge of 2% would be $8,000.

You may want to ask your real estate agent or mortgage lender to recommend a title company with low rates.

In many states, the buyer and seller split escrow fees or negotiate how they will be divided. The market temperature — buyer’s or seller’s market — can affect the negotiation.

Escrow After the Sale of the House

If you put less than 20% down on a conventional loan or take out a government-backed loan, your lender will typically establish an escrow account at closing where you will place money to pay homeowner’s insurance, property taxes, and, if necessary, private mortgage insurance (commonly called PMI). If your home is required to have flood insurance, then your lender is, in turn, required to escrow your insurance fees for this policy.

Once established, the account is maintained by monthly contributions that you make as part of your mortgage payment. When taxes and insurance are due, the lender or servicer pays them.

The escrow amount will be reflected on your mortgage statements. Once a year, your lender or loan servicer will examine your escrow account to make sure it is collecting the proper amount to cover your property taxes and insurance, and adjust your monthly payment as necessary.

If an excess of more than $50 is anticipated, you’ll receive an escrow refund. If the excess is less than $50, the loan servicer can choose whether to send you a refund or apply the overage to the following year. In the event of an escrow shortage, the homeowner might be asked to make an extra payment to escrow (this happens, for example, if there is an unexpected increase in property taxes). A loan servicer may also allow the homeowner to make up the shortage by adding to their monthly payments going forward. Either way, the monthly payment will be adjusted to ensure that, going forward, it reflects the true cost of the year’s taxes and insurance bills.

Using an escrow account for taxes and insurance helps protect you and your lender by ensuring that you maintain proper insurance coverage and pay your taxes on time. Consider what could happen if a property owner allows home insurance to lapse and then the home is damaged or destroyed: There would be no insurance funds to pay to repair or rebuild the home, and both the owner and lender would take a loss financially.

Recommended: What Is PMI and How to Avoid It

The Takeaway

What is escrow in real estate? It’s the holding of money and documents by an impartial third party during a home sale, or the lender’s collection of funds from a mortgage holder so that the lender can ensure that insurance fees and taxes are paid. Escrow is intended to protect buyer, seller, and lender and should bring peace of mind to all involved in a real estate transaction or mortgage.

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FAQ

What is an escrow balance?

The escrow balance is the money that is held in a mortgagor’s escrow account to pay taxes, insurance, and if applicable, private mortgage insurance and flood insurance.

What is an escrow agreement?

An escrow agreement is a contract that outlines the terms and conditions of a transaction for something of value, which a third party holds until all conditions have been met.

What does it mean to be in escrow?

It means that an escrow agent is holding the earnest money, loan funds, and property deed until an appraisal and title search are done and financing has been approved. The earnest money typically will be applied to the down payment or closing costs as the closing progresses.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

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Oct
01
2024
How to Make End of Year Donations

Tax-Deductible or Not? Your Guide to End-of-Year Donations

By | Budgeting & Goals, Financial Independence, money | Comments Off on Tax-Deductible or Not? Your Guide to End-of-Year Donations

At the end of the year, when holiday celebrations and expressions of gratitude are in full swing, many people think about making a charitable donation. If you donate to a qualifying organization, not only can your funds do good, they may also be deductible when you pay your taxes.

Maybe it’s the animal shelter around the corner from your home, or perhaps it’s a scholarship fund at your alma mater that does amazing work. Whatever pulls at your heart and makes you feel like you’re doing the right thing can be a good cause for donations. The organization you give your money to benefits. Read on to learn if your contribution could also lower your tax bill.

What Qualifies as Charitable Giving?

In the eyes of the Internal Revenue Service (IRS), a charitable donation is a gift of money, property, or other asset that you give to a qualifying organization, known as a 501(c)(3).

To find out if an organization you’d like to support is eligible to receive tax-deductible contributions, you can search for it on the IRS’s database .

You may want to keep in mind that money or assets given to political campaigns or political parties do not qualify as tax-deductible donations. In fact, no organization that qualifies as a 501(c)(3) can participate in political campaigns or activities.

Organizations that engage in political activities without bias, however, can still sometimes qualify. So, a group can educate about the electoral process and remain within guidelines. They just have to go about it in a nonpartisan way.

Can I Deduct My Year-End Charitable Donation?

Currently, charitable donations could only be deducted by tax filers who itemized their deductions. That means that rather than take the standard deduction on their income tax return, they chose the more complicated path of listing all of their eligible expenses.

Recommended: 26 Tax Deductions for College Students and Other Young Adults

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How Much of a Charitable Donation Is Tax-Deductible?

The IRS sets limits on how much of a charitable contribution you can deduct from your taxes, and these are frequently updated. The amount is typically expressed in terms of the percentage of your adjusted gross income (AGI) that you may claim.

In 2024, this limit for cash contributions (say, money debited from your checking account) is 60% of a person’s AGI. The top figure is 20%-50% of AGI if you make a non-cash contribution, such as stock shares or a vehicle. The exact figure will vary with both the type of organization to which you are making the donation as well as the kind of item you are donating.

Of course, you are welcome to donate as much as you like. Just keep in mind that any charitable giving above those figures is not eligible for a deduction at tax time.

Recommended: How to Reduce Taxable Income for High Earners

Tips for Making End-of-Year Donations

To ramp up both the impact and benefit of a charitable donation, here are some strategies you may want to keep in mind:

Making a Timely Donation

Don’t lose track of your timing: The deadline for charitable donations is December 31. If you’re looking to deduct the donation in the current tax year, you will want to make sure your charity has ownership of whatever asset you are donating by the close of business on the 31.

You may also want to make sure that your preferred payment method is accepted by the charity so it doesn’t get kicked back and cause delays. Putting a reminder in your calendar for, say, mid-December can be a good way to make sure you don’t run late with your giving. (Of course, you also want to make sure you don’t miss the tax-filing deadline come April, either.)

Taking Advantage of Company Matching Programs

Your place of employment might have a matching program for charitable giving. They might, for example, match your donation amount dollar for dollar up to a certain amount. If so, it could significantly bump up the amount you could otherwise afford to give.

If you’re unsure about whether your company has a program, it can be worth reaching out to your HR department for further information.

Giving Rewards on Your Credit Card

If you are making a contribution on a budget, you might consider donating credit card rewards you earn, such as hotel points or airline miles. This can be a great way to use points or other rewards that would otherwise just expire. Many credit card companies, hotels, and airlines will make it easy to give your rewards to nonprofit organizations.

Donating Assets from Your Brokerage Account

If you’re looking to lower your taxes, you may want to consider donating assets from your brokerage account to a nonprofit. This may take some time and planning, but the benefits of donating an over-allocated position that’s outperforming can be worth it.

You may be able to receive tax advantages and rebalance your portfolio, while also helping an organization increase its assets.

Recommended: What Tax Bracket Am I In?

Setting up a Recurring Donation

You can get a headstart on next year by creating a recurring contribution now. Many organizations allow you to donate monthly through their websites using a credit card, so you might be able to earn rewards at the same time. By establishing your donation plans now, you won’t have to even think about end-of-the-year giving next year.

Keeping Good Records

If you want to deduct your donation on your taxes, you’ll want to make sure you have the right receipts to back up the transaction.

You’ll want to keep records of your donations. For cash donations under $250, you’ll either need a bank record (like a canceled check or bank statement) or a written acknowledgment from the charity which includes the date and amount of your contribution. (The exception is goods dropped off at, say, a clothing donation bin.)

For cash donations over $250, a bank record isn’t insufficient. Instead, you’ll need something in writing from the charity which includes the date and amount of your donation.

If you are making noncash donations valued at $500 or more, you’ll need to fill out one or more of the IRS Form 8283 . If the donation exceeds $5,000 in value (say, if you gift a car you no longer need to a favorite local organization), you’ll also need to get a written appraisal from a qualified appraiser. In addition, know that donations of $250 or more will also require what is known as a “contemporaneous written acknowledgment.” This is a document that describes the property, states whether the organization provided the donor with goods or services as a result of the contribution,and share an estimate of the value of any such goods or services provided.

Speaking with a Professional

Working with a personal accountant can help answer any questions you may have about how tax laws will impact your tax contribution, as well as help you make the most strategic and efficient charitable donation.

Recommended: Are 401(k) Contributions Tax Deductible? Limits Explained

The Takeaway

Giving can be a good idea for a number of reasons. In addition to helping a nonprofit organization meet its operating costs for the year, you can feel good about what you are doing with your money, and you may also benefit from tax deductions.

Giving can also help you get the new year started on the right foot. If you’re looking for other ways to get your financial life in order, consider a new bank account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.


Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.30% APY on SoFi Checking and Savings.

FAQ

Should donations be deductible?

Charitable contributions are usually tax-deductible, but there can be limitations as well as exceptions, so it can be wise to inquire in advance. Contributions can often take the form of cash, artwork, cars, and other items of value.

Are charitable contributions no longer tax-deductible?

Charitable contributions can be tax-deductible. However, they must be claimed as itemized deductions; you would do so on Schedule A of IRS Form 1040. Keep in mind that there’s a limit on charitable cash contributions: For 2024, it’s 60% of the taxpayer’s adjusted gross income.

Can you deduct $300 in charitable contributions without itemizing?

The short answer is no. Currently, you must itemize charitable contributions in order to claim them as deductions.

Photo credit: iStock/ThitareeSarmkasat

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.30% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.30% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/8/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOBNK-Q324-060

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Oct
01
2024

Can You Use a 529 Plan for Private School?

By | Going to College, Student Loans, student_loan | Comments Off on Can You Use a 529 Plan for Private School?

A 529 plan is a popular way to help pay for college. But it can also be used for private school to help cover the cost of tuition.

There are rules and restrictions about 529 private school use, and where you live can make a difference. If you’re considering private education for your child, here’s what you should know about 529 plans.

Saving for Private School Tuition


The cost of private school is substantial: The average K-12 tuition is $12,350 a year, according to the Education Data Initiative.

A 529 savings plan is an investment account that’s designed to help families pay for a student’s education expenses. Although a 529 is primarily meant to be used for college expenses, up to $10,000 from a 529 can be applied to K-12 private school tuition, as long as your state considers it a qualifying expense. This is one of the many 529 plan benefits that families can take advantage of.

Recommended: Prepaid College Plans by State

When to Establish a 529 Plan for Private Education


If you’re expecting your child to go to college, you may want to open a 529 savings plan for them. Parents, relatives, and friends can all make contributions to the plan. 529 plans can help students pay for college tuition and related qualifying expenses so they won’t need to take out as much in federal and private student loans.

One of the advantages of a 529 is that money in the account can grow over time, especially if you open it when your child is young. As of mid 2023, the national average account balance for 529 savings plans was $27,741, according to the Education Data Initiative.

Another perk of a 529 plan is the tax benefits that come with it. There is no federal income tax on earnings and qualified withdrawals from the plan. In addition, your state might also offer income tax benefits on contributions to a 529.

However, using a 529 for private school means you may end up depleting some of the funds that would otherwise go toward your child’s college expenses, so it’s wise to be strategic about this option. For example, if your oldest child decides they don’t want to go to college after all and they’re currently in private school, you could use the 529 account to help cover their private school cost. Or if you’re at risk of overfunding the account beyond your state’s 529 contribution limits, using some of the money in the 529 for private school can make sense.

If you use a 529 for private school and your child then has less money for college costs, there are financial aid options that can help. You can explore scholarships and grants, and federal and private student loans.

Recommended: SoFi Scholarship Search Tool

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How to Use a 529 Plan for Private School


There are rules about using a 529 to fund a child’s private school tuition. Make sure you understand the following:

State Eligibility Restrictions


Your ability to use a 529 tax-free for private school depends on the state you live in. Not all states consider elementary and secondary private school tuition as a qualifying education expense. If your state treats private school tuition as a non-qualifying expense, you might face additional tax on any withdrawals you make.

States that don’t consider distributions for private school as a qualifying expense include California, Nebraska, and New York to name a few. Check the rules for your state.

529 Plan Qualified Expenses


When 529 withdrawals are used for college costs, the list of qualified expenses (meaning those that don’t incur taxes or penalties) is broad. Tuition and fees, textbooks, school computers, lab equipment, and room and board are all considered qualifying college expenses by the IRS. But with private schools, qualified expenses are restricted to tuition fees only.

Tax Considerations


A 529 plan is a federal tax-advantaged savings vehicle. Earnings grow tax-free and 529 distributions up to $10,000 annually for private school tuition are not taxed.

However, non-qualified withdrawals, such as using 529 funds to pay for private school uniforms or taking out more than the $10,000 limit for tuition, are subject to federal income taxes and might incur other 529 plan penalties.

Some states offer tax deductions or credits on 529 contribution amounts, but a number of states do not. California, for example, doesn’t consider private school tuition a qualifying 529 expense. The earnings portion of a 529 withdrawal used for private school is subject to California income tax, and an additional 2.5% tax applies.

To be eligible for contribution-related tax benefits in certain states, you must have opened the state-sponsored 529 plan. If you opened an out-of-state 529 plan, you might not be able to claim your state’s 529 tax perks.

529 Withdrawal Checklist to Pay for Private School


Before using a 529 to pay for K-12 private school tuition, take the following steps.

1. Verify Your State’s Rules


It’s important to understand your state’s rules and restrictions regarding 529 withdrawals for private school tuition. For example, you may need an in-state plan to qualify for tax benefits.

Also, find out if your state treats private school tuition as a qualifying expense for tax deductions or not.

2. Discuss the Withdrawal With a Tax Professional


Speak to a trusted tax professional to review how using a 529 for private school might impact your taxes. They can offer guidance based on your specific financial situation and state’s rules so you’re not caught off-guard with a greater tax liability than you expected.

3. Initiate a 529 Withdrawal


Some 529 plans let you request a withdrawal online. Others might require you to contact the plan’s administrator to start the withdrawal process. Typically, the funds can be disbursed directly to your child’s private school, but there may be an option to disburse them to the account owner.

The Takeaway


A 529 plan allows you to invest in your child’s education. While these plans are a popular way to help save for college, you can use 529 savings to help pay for your child’s K-12 private school education with certain caveats. The funds can only be used for private school tuition, and no more than $10,000 can be withdrawn tax-free. Some states don’t consider private school tuition as a qualifying expense, which could result in an added tax liability on your state tax return. Double-check your state’s 529 rules.

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FAQ


Can you use a 529 to pay for private K-12 and college education?


A 529 can generally be used for private schools, including religious K-12 schools. Up to $10,000 of your 529 savings can be used toward K-12 tuition each year.

Can you use a 529 plan to pay private student loans?


Yes, you can use a 529 plan to repay private student loans. However, a lifetime cap of $10,000 of qualified student loan repayments can be repaid using 529 funds.

Can 529 plans only be used at in-state schools?


You can use a 529 for private school tuition as long as the institution is an accredited private college, university, trade school, or graduate or professional school.

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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q324-062

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Oct
01
2024

529 Annual Plan Contribution Limits by State in 2024

By | Going to College, Student Loans, student_loan | Comments Off on 529 Annual Plan Contribution Limits by State in 2024

A 529 plan allows you to save money for a child’s education costs. This tax-advantaged plan can be an effective way to build a college fund. However, there are rules regarding 529 plans you should know about, including 529 contribution limits, which differ based on where you live.

Learn how a 529 works and the max contributions to 529 plans in each state.

What Is a 529 Plan?

529 plans, also known as qualified tuition programs, are tax-advantaged savings plans that are designed to be used for qualified education expenses like tuition, housing, and books at postsecondary institutions such as college or trade school. Parents can also withdraw up to $10,000 of 529 funds annually to use for a child’s elementary or secondary school education at a public, private, or religious school.

Each 529 plan has a named beneficiary (the child the plan is for), and the account holder — usually a parent or grandparent — contributes savings to the plan up to the allowable 529 limits. Once contributions are made, you typically have a range of investment options to choose from, including mutual funds or exchange-traded funds (ETFs). Earnings and qualified withdrawals are not subject to federal taxes.

There are some 529 plan withdrawal penalties, however. For instance, any amount of money from the plan used for something other than qualified expenses for the beneficiary’s education incurs an income tax liability and a 10% penalty upon withdrawal.

Why Are There Max Contribution Limits?

While there are no yearly contribution limits to 529 plans, there are aggregate max contribution limits that apply to the total contributions to the plan. States sponsor and operate their own 529 education savings plans and set their own aggregate max contribution amounts. Many states have a total allowable contribution limit of $500,000 per beneficiary, though some states have lower or higher 529 limits. These limits are generally based on the cost to attend a four-year undergraduate or graduate program within the state.

Students who don’t have enough funds in a 529 plan to cover the cost of college can turn to other forms of financial aid, including scholarships, grants, and federal and private student loans.

529 Plan Max Contribution Limits by State

The max contributions to 529 plans vary based on the state plan you’re enrolled in. Below is a list of 529 contribution limits for 2024 in every state.

State Contribution Limit
Alabama $475,000
Alaska $550,000
Arizona $575,000
Arkansas $500,000
California $529,000
Colorado $500,000
Connecticut $550,000
Delaware $350,000
Florida $418,000
Georgia $235,000
Hawaii $305,000
Idaho $500,000
Illinois $500,000
Indiana $450,000
Iowa $420,000
Kansas $475,000
Kentucky $450,000
Louisiana $500,000
Maine $545,000
Maryland $500,000
Massachusetts $500,000
Michigan $500,000
Minnesota $425,000
Mississippi $400,000
Missouri $550,000
Montana $396,000
Nebraska $500,000
Nevada $500,000
New Hampshire $596,925
New Jersey $305,000
New Mexico $500,000
New York $520,000
North Carolina $550,000
North Dakota $269,000
Ohio $541,000
Oklahoma $450,000
Oregon $400,000
Pennsylvania $511,758
Rhode Island $520,000
South Carolina $575,000
South Dakota $350,000
Tennessee $350,000
Texas $500,000
Utah $560,000
Vermont $550,000
Virginia $550,000
Washington $500,000
Washington D.C. $500,000
West Virginia $550,000
Wisconsin $567,500
Wyoming N/A (the state does not offer a 529 plan)

States with Highest Aggregate Limits

The states with the highest allowed aggregate 529 contribution limits include:

•   Arizona

•   New Hampshire

•   South Carolina

•   Utah

•   Wisconsin

These states have a maximum contribution limit greater than $550,000, with New Hampshire allowing the highest 529 limit in the U.S. at $596,925.

States with Lowest Aggregate Limits

State 529 programs that have the lowest total contribution limits of $350,000 or lower include:

•   Delaware

•   Georgia

•   Hawaii

•   New Jersey

•   North Dakota

•   South Dakota

•   Tennessee

Georgia’s 529 savings plan has the lowest aggregate contribution limit nationwide at $235,000, while Wyoming doesn’t offer a state-sponsored 529 plan at all.

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Tax Benefits for 529 Plans

The advantages to 529 plans go beyond saving for your child’s college education. A 529 might unlock certain tax benefits. For example, earnings in the account grow tax-free and there is no federal income tax liability for qualified withdrawals. In some states, qualified 529 withdrawals might not be subject to state income tax either.

A number of states allow you to deduct your 529 contributions up to a certain limit from your taxable income on state income tax returns. For example, West Virginia lets state residents with an in-state 529 plan deduct up to $550,000 in annual contributions per beneficiary from their state income taxes. In Louisiana, residents are allowed a state income tax deduction for in-state 529 contributions of $2,400 ($4,800 if filing jointly) per beneficiary.

But not all states allow you to deduct 529 contributions. For example, California, Kentucky, and Hawaii don’t offer a state tax deduction or credit for 529 contributions on their state income tax returns. However, qualified 529 distributions are exempt from income tax in all three states.

Nine states (Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) have no state income tax so there is no 529 deduction in those states. (As a reminder, Wyoming has no 529 plan.)

Tax deduction limits and rules vary by state, so check with yours.

529-to-Roth IRA Rollover

Traditionally, a downside to saving money in a 529 plan has been the 10% penalty and potential tax liability incurred on earnings for non-qualifying withdrawals. This might come up if you over-saved in the account, or if your child chooses not to go to college.

The SECURE 2.0 Act of 2022 has addressed these concerns. Beginning in 2024, unused 529 funds can be rolled over into a Roth IRA under the original beneficiary’s name without penalty or tax implications.

There are some guidelines for a 529 to Roth IRA rollover. The 529 plan must have been active for at least 15 years, and the rolled over funds must have been in the account for at least five years. Finally, the maximum annual rollover contribution permitted for 2024 is $7,000, based on Roth IRA 2024 contribution limits (IRA contribution limits typically change annually). Despite these rules, the ability to do an IRA rollover gives 529 account holders a penalty-free option, if needed.

How to Maximize Your 529 Contributions

If you’re considering a 529 for your child, you are not limited to choosing a 529 plan from the state you reside in. Many states allow out-of-state residents to open a 529 account. Here are some tips on how to maximize your savings in a 529.

•   Explore plans from multiple states and compare their tax benefits and fees to potential tax benefits and fees of your state’s plan.

•   Check to see if your company offers 529 plan employee benefits. Some employers now provide these benefit plans, which allow you to contribute directly from your paycheck.

•   Many states offer direct-sold plans in which you select the investments in the plan yourself, and broker-sold plans in which a broker selects investments for you. Broker-sold plans typically come with more fees. Consider enrolling in a direct-sold 529 plan to help save on fees.

•   Anyone, including grandparents and family friends, can contribute to a 529 plan, so make sure loved ones are aware that you have a 529 for your child to save for college. They may want to make a contribution to the plan as a birthday gift, for instance.

•   You can open a 529 as soon as the beneficiary has a Social Security number. Start saving early and set up automatic contributions to the plan. The longer the money is invested, the more time it has to grow.

The Takeaway

A 529 can be a good way to save for your child’s education. The earlier you open a 529, the more time you have to contribute and save, and the more time the money in the plan has to grow. Just be sure to find out the 529 maximum contribution limits for the state in which you have the plan.

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FAQ

What happens if you contribute too much to a 529 plan?

Contributing more than a 529 plan allows might result in taxes and penalties. If you over-contribute to a 529 account beyond the 529 limit, one option is to change the primary beneficiary of the plan to another child to be used for their education savings. You can also consider rolling the funds into a Roth IRA for the original beneficiary. Either option can help you avoid a taxable event.

What is the 5-year rule for 529 plans?

You’re allowed to contribute up to $18,000 ($36,000 if filing jointly) per beneficiary in 2024 without paying a gift tax. This amount is not counted against your lifetime gift tax exemption. To contribute more in one year to a single 529 recipient without impacting your lifetime gift tax exemption, you can front-load up to five years of contributions (up to $90,000 in 2024) into the 529. Doing so avoids impacting your lifetime gift tax exemption, but it also means that you can’t make additional contributions to the same beneficiary for the next five years.

What happens to a 529 plan if your child doesn’t go to college?

If your child doesn’t go to college, you have a few options for a 529. You can consider rolling the funds into a Roth IRA for the beneficiary, for instance. Or you could change the primary beneficiary to another family member, like a younger sibling.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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SOIN-Q324-063

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Oct
01
2024

Is a SWIFT Code the Same as a Routing Number?

By | money, Terminology | Comments Off on Is a SWIFT Code the Same as a Routing Number?

A SWIFT code, a group of letters and numbers used globally to identify a bank account, is similar to a routing number, but they function differently.

Say you want to transfer money from your bank account to someone else’s: You’ll need to know some basic information about the recipient’s financial institution and their account. This ensures safe and accurate electronic transfers of funds. If you’re conducting a domestic transfer (that is, from one bank account in the United States to another), an ABA routing number will be required. If you are moving funds internationally (sending money to another country from the U.S. or vice-versa), a SWIFT code is typically required.

Key Points

•   SWIFT codes and routing numbers are both used to transfer money, but they are not the same: SWIFT codes are used for international transfers, while routing numbers are used for domestic ones.

•   SWIFT codes are alphanumeric and identify banks globally, while routing numbers are numeric and used within the U.S.

•   The Society for Worldwide Interbank Financial Telecommunications, founded in 1973, oversees SWIFT codes

•   The American Bankers Association, established in 1910, manages the use of routing numbers in the U.S.

•   Incorrect SWIFT codes or routing numbers can cause transaction failures and potential fees, but in some cases may lead to deposits in the wrong account.

Understanding SWIFT Codes

To send money internationally, you’ll usually need a SWIFT code. Learn more about how this string of letters and numbers usually works.

What Is a Swift Code?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a network that allows banks and other financial institutions to electronically communicate with each other securely, across borders. A key part of that involves a SWIFT code, also called a BIC (Business Identifier Code), which identifies a specific bank, with information about the country, location, and, if applicable, branch.

Purpose and Usage of SWIFT Codes

SWIFT codes identify specific details of a bank to ensure international payments are going to the right bank. These codes are comprised of eight to 11 alphanumeric characters:

•   The first four characters are letters and represent the name of the bank.

•   The next two characters, also letters, indicate the country the bank is located in.

•   The next (and sometimes final) two characters can be letters or numbers and indicate where the bank’s main office is located.

•   In instances where the bank is large enough to have branches in multiple countries, cities, or regions, there may be a three-digit branch code at the end of the SWIFT code.

If you’re sending an international wire transfer from the United States, you’ll usually need to know the recipient’s SWIFT code. There are a number of countries that do not participate in SWIFT, but generally speaking, SWIFT is the global standard for international payments.

Recommended: Guide to International Bank Account Numbers (IBANs)

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Understanding Routing Number

To send money domestically in the United States, you’ll usually need a routing number. Here’s important information about what these series of digits are and how they function.

What Is a Routing Number?

A routing number is a nine-digit code composed of numbers that are used to identify banks and credit unions within the United States during domestic transfers.

These codes have been around for more than a century. The American Bankers Association (ABA) started to link routing numbers to financial institutions in 1910 as a unique identifier.

Purpose and Usage of Routing Numbers

Like a SWIFT code, a routing number helps direct money transfers to the right financial institution. You’ll also need the recipient’s bank account number to successfully move the funds.

You might think of the routing number like a street name for your bank account (Main or Church Street, say), but your bank account number is the actual numeric portion of your address (to continue the analogy, this would specifically identify a house), to ensure money goes to the right “home” on that “street.”

(It’s worth noting that Canada also uses routing numbers, but not ABA routing numbers. Instead, Canada’s eight- or nine-digit routing numbers include a three-digit institution number and a five-digit transit number, and possibly a zero.)

ACH transfers and wire transfers require knowing the recipient’s bank account and routing number. And you’ll frequently need to know your own routing number for several common transactions, such as:

•   Online bill and tax payments

•   Payment app setup

•   Direct deposit setup

There are some ways to send money to another person in the United States without needing to know their routing number. For instance, you can write and mail a check, you can send a money order, and you can use a peer-to-peer (P2P) transfer app to send money to someone in the U.S. without needing to know their routing number.

Differences Between SWIFT Codes and Routing Numbers

While they serve a similar purpose in electronic funds transfers, there are some key differences when comparing SWIFT codes vs. routing numbers.

Domestic vs. International Transactions

In the U.S., you’ll use routing numbers for domestic transfers. For international transactions, you’ll need to know the recipient’s SWIFT code. U.S. banks typically have a SWIFT code for such situations that is specific to each branch. (Some smaller banks and credit unions may not, however, have SWIFT codes.)

Code Structure and Format

Routing numbers are nine characters, all digits. SWIFT codes are alphanumeric and are typically between eight and 11 characters long.

Issuing Authorities

The Society for Worldwide Interbank Financial Telecommunications oversees SWIFT codes and was founded in 1973. The American Bankers Association manages routing numbers in the U.S. and was established much earlier — in 1910.

Recommended: How to Send Money to Someone Without a Bank Account

When To Use SWIFT Codes and Routing Numbers

If you are wiring money internationally, you’ll need to know a recipient’s SWIFT code. (There are a number of countries that do not use SWIFT codes, in which case you’ll need to find an alternate way to identify their bank during an electronic transfer or move money using another method.) Similarly, if someone is wiring money from another country to you in the U.S., you’ll need to provide them with your bank’s SWIFT code.

If you’re transferring money to someone else domestically in the United States, you’ll instead need to know their bank’s routing number. You’ll also need your own routing number when transferring funds, as well as setting up direct deposit, online payments, and other forms of digital transfers and payments.

Locating SWIFT Codes and Routing Numbers

You can typically find your SWIFT code on a bank statement or on your bank’s website or app. Call customer service for your bank if you’re unable to locate it.

Your routing number is also easy to find online or via mobile app when you log into your account. The routing number is also printed on your paper checks. Typically, it is the first set of numbers at the lower left corner of a check.

The Takeaway

SWIFT codes and routing numbers serve the same basic purpose of helping to identify banks when transferring money electronically, but they are used for different kinds of transfers. Domestic transfers in the U.S. rely on routing numbers while international transfers typically need SWIFT codes.

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FAQ

Can a SWIFT code be used for domestic transactions?

In the U.S., SWIFT codes are not used for domestic transactions. Instead, you’ll need to know your bank account number and routing number, as well as the bank account and routing number of the person to whom you are wiring money. Or, if someone is transferring funds to you, they will need your identifying information, including your bank account number and routing number.

Are SWIFT codes and routing numbers interchangeable?

When considering SWIFT codes vs. routing numbers, it’s important to recognize that they are not interchangeable. They’re issued by different authorities, have a different number of characters, and are used for different purposes. While similar, routing numbers are for domestic transfers, and SWIFT codes are for international transfers.

What happens if I use the wrong SWIFT code or routing number?

If you use the wrong SWIFT code or routing number for a wire transfer, the transaction will typically fail, and the payment will be returned to you. In some cases, you might have to pay a fee (including if you resubmit the transaction), and it’s possible money could be routed to the wrong account. For this reason, it’s important to verify that you have the correct SWIFT or routing number when transferring funds.

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