529 Plans for Education Expenses

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Empty College Classroom

It’s a very weird time to be blogging. Everything I’d write about seems irrelevant but, at the same time, we have so much time to read, and we need some content. And, since schools are dealing with the craziness of closed classrooms, I figured I’d compound the oddities and discuss education savings. This works similar to a double negative, right? Irrelevant plus irrelevant equals relevant. After all, you want to make sure your kids (or grandkids) are financially set up to attend the best Zoom classes available. There are a few ways that you can choose to save for college, but I’m going to focus on one of the most common and one that is specifically used for education, the 529.

What is a 529 plan? 

It is a savings account that can be used to pay for qualified education expenses. This type of account is beneficial because it is a tax-deferred account. Additionally, the distributions are not subject to the federal tax when they’re used toward qualifying expenses. You can think of this plan similar to a Roth IRA but dedicated to education instead of retirement; it is funded with after-tax money which will grow untaxed.

Who offers 529 plans? 

Most states offer their own 529 plan. There are differences in the plans and their investments so it’s important to look at them all and compare. You can invest in a plan from any state, it does not need to be your home state. However, your home state may offer additional state income tax benefits, so it is important to fully understand the policies from your state when considering your options.

What are the qualified expenses? 

529 plans can be used to cover college tuition and fees, books and supplies, computers and internet, room and board, and, as of a recent change, student loans. Additionally, you can use the money toward primary education as well. Tuition for K-12 schooling is a qualified expense.

Who can be a beneficiary? 

You can name any beneficiary for the account. Most typically, it is your child or a child of someone in your family but, it can also be someone you’re not related to. You can even name yourself as the beneficiary if you’re thinking about furthering your education or planning for a child that is coming. However, it’s important to know that each plan can only have one beneficiary. So, if you have multiple people that you’re saving for, you’ll either need one plan for each or you’ll need to add new plans closer to the time of distribution and choose a beneficiary at that time and transfer funds. Luckily, you can change your plan’s beneficiary without any penalty, as long as it is a family member of the original beneficiary – this even includes extended family such as aunts/uncles, in-laws, spouses of nieces, nephews, cousins.

But what if I end up needing the money for something else? 

If you have to take the money out of a 529 with a non-qualified expense, you can do so. The earnings portion of this distribution will be subject to income tax and 10% penalty. The contributions are not subject to any tax or penalty since they are already after-tax dollars.

There is already a plan for the person I want to support, can I contribute to it? 

Yes, you can contribute to someone else’s plan. In fact, you can even take advantage of the 5-year gift tax averaging to make one large deposit and spread the tax benefits over the next years. This is sometimes called superfunding and it can be a great tool for managing estate taxes while giving the account a head start on earnings.

A 529 plan is a great option for educational savings but, as with most financial things, the right choice is going to be different for everyone. If you’re thinking about using a 529, we suggest speaking to your financial professional to better understand all of your possibilities and get recommendations based on your specific situation.



Want more information about 529s? Check out https://www.savingforcollege.com/. They have a ton of useful information and links. 



Questions, comments, feedback? Email jared@ware2now.com




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