Beyond Investments- 529 Savings Plans

A 529 College Savings Plan allows an individual to invest money into an account that will accumulate tax-free when used for qualified education expenses. This plan is a powerful planning tool often used by parents or grandparents wishing to allow family members to pursue higher education while saving taxes along the way. The assets always belong to the account owner, and are for the benefit of a primary beneficiary. It’s important to mention the beneficiary can be changed at any time giving 529’s tremendous flexibility.

So what’s the catch?

There’s a 10% penalty in addition to ordinary taxes on earnings if the money is used for anything else other than “qualified educational expenses.” This is just one example of the types of questions that arise when digging into the details of how these plans work.

What are the qualified educational expenses?

• Tuition and fees
• Room and board
• Off-campus housing can be qualified if the rent is comparable in cost to on-campus housing
• Meal plans
• Books and supplies (includes computers and software)

Do I have to use my state’s 529 plan?

There is no requirement to use your state’s 529 plan. Additionally, your 529 can be used to fund education in any state regardless of residency. States with a state income tax may benefit by using their state’s plan and may receive a state income tax deduction for contributions.

What happens if my child decides not to go to college?

Fortunately, there have been many law changes over time that has given 529’s increased flexibility. For example, you can now use the money to cover the cost of vocational, trade, or apprenticeship programs. The account can also be transferred to a family member or yourself without incurring income taxes or penalties. A family member includes siblings, first cousins, grandparents, aunts, uncles, and even yourself.

Is it too late to start a 529 for my child’s education?

No, it’s always the right time to start saving. That being said, it’s imperative to match the investment risk to the timing of distributions for educational expenses. It is also important to acknowledge investments can be volatile, especially in the short-term, so the longer the investment horizon, the greater the potential tax benefit from a 529 plan.

What has changed in recent years?

With the Tax Cut and Jobs Act of 2017, up to $10,000/year per student can be used for K-12, private, or religious school education. Under the Secure Act passed in late 2019, up to $10,000 (lifetime limit) can be used to repay student loans. Plus, up to another $10,000 may be used for each sibling of the beneficiary if they have any student loans.

Many clients enjoy providing for the next generation’s education, and we appreciate being by their side, navigating these decisions. If you have any questions regarding education planning, feel free to reach out to begin a conversation. We’re here to help.