Source: Flickr user John Walker.
Learning Quest is Kansas' state-sponsored 529 college savings plan. 529 college savings plans offer great tax and other financial benefits for people saving for college, particularly for residents of the state sponsoring a given plan.
The key benefits of Learning Quest and other 529 plans include:
- Tax-deferred compounding of money in a plan.
- Tax-free withdrawals when used for qualified educational purposes.
- Potential for state income tax deductions on contributions to state-sponsored plans.
- Being considered parental (instead of student) assets for financial aid eligibility.
- Withdrawals from 529 plans to pay for college are not considered "base year income" for the purposes of future financial aid eligibility.
Learning Quest benefits for Kansas residents
Because Learning Quest is Kansas' state-sponsored 529 college savings plan, Kansas residents can deduct up to $3,000 of contributions to Learning Quest per beneficiary per year from their income for state taxes. That amount doubles to $6,000 for those who are married and file joint returns. Kansas also provides some bankruptcy protection for residents of Kansas with money in a Learning Quest account set up with their children or grandchildren as beneficiaries.
While you don't have to be a Kansas resident to contribute to a Learning Quest account, only Kansas residents get those particular benefits, and only with money invested in a Learning Quest plan. For those reasons, residents of Kansas should consider the Learning Quest plan first among all the available 529 plans. Similarly, if you're a resident of a different state, you should consider your state's plan before Learning Quest, as most states have similar benefits for their residents who contribute to their plans.
What are the limits?
Learning Quest has a per beneficiary limit of $345,000, meaning you can't contribute to the account of a beneficiary if that account has $345,000 or more in it. If you're anticipating higher education expenses than that (for instance, if you're expecting to pay for medical school on top of college), you could always consider opening an additional 529 account in a different state. You wouldn't get the state-specific benefits associated with any given plan, but the general benefits are still open to you.
Additionally, contributions to 529 plans like Learning Quest are affected by gift taxes. You can contribute $14,000 per gift giver per beneficiary per year without any gift tax implication (assuming these are the only gifts you're giving to the beneficiary). 529 plans also have a "five-year rule" that lets you give up to five years' worth of gifts in a single year ($70,000) without incurring any gift tax concerns, so long as you make no more contributions until that five-year clock resets.
Anything to watch out for?
Learning Quest accounts -- like other 529-style college savings accounts -- are intended for use to pay for qualified education expenses like tuition, room and board, and mandatory equipment and fees. The tax-free withdrawals are only available if the money is used to pay for those types of expenses. Scholarships or other similar payments reduce the amount you can withdraw tax-free.
Additionally, if the money isn't used for qualified education purposes, most taxable distributions from Learning Quest or other 529-style accounts have a 10% penalty on top of any taxes. The exceptions to that 10% penalty are:
- Death or disability of a beneficiary.
- Withdrawals up to any amount received via a scholarship or other assistance (like Veterans benefits).
- The beneficiary attends a U.S. military academy.
- In some cases when coordinating 529 plans with the American Opportunity or Lifetime Learning credits.
On a federal level, the taxes and penalties only apply to your gains above your contribution basis. In Kansas, even the amount contributed to a Learning Quest account is taxable upon withdrawal if the money in the account isn't used for qualified education purposes. If you live in a different state, you'll need to check with your state on how it handles non-qualified education expenses withdrawn from a 529 college savings plan.
A great foundation for college funding
If you're confident your child will attend college, 529 plans like Learning Quest provide a tremendous foundation for your savings to help cover those expenses. Just be sure you're working within the gift limits, have a decent understanding of what that education will cost, and consider any state benefits you'll get from working with your state's plan.
If you're not confident your child will attend college, or how long your child's education journey will be, consider saving money outside of a 529 plan and earmarking that money toward your child's future. As wonderful as Learning Quest and other 529 plans can be, their benefits are designed around college funding, and that's the specific need they meet best.
