Most people have heard of 529 College Savings plans and understand their value in relation to saving money for future higher education for young family member. What some may not know is that the qualifying use of these dollars as well as options for unused funds have expanded considerably in the past few years.
As a quick primer, a 529 Plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. The benefits include tax-deferred growth on the investments while in the plan: the earnings can be tax-free when used to pay for specific education costs. Since 529 Plans are run at the state level, some states offer specific tax benefits for residents when using their state’s particular plan. 529 Plans encompass two main types of savings programs, Prepaid Tuition Plans and College Savings Plans. For our purposes, we’ll be looking at College Savings Plans.
Ultimately, WE have changed, meaning our nation’s educational needs and options. Due to expanding options for alternative forms of education and demand for more flexibility in their use, the rules around 529 plans by necessity have expanded.
This month, we’ll talk about how fund can be used to maintain the tax benefits of these plans, and next month we’ll talk about options for unused 529 dollars.
Qualified Education Expenses
Generally, tuition, fees, books, supplies, and equipment/technology required for attendance at a higher education institution are considered qualified expenses. Reasonable cost for room and board are also included in this list if the student is attending school at least half-time. Additionally, education expenses incurred to allow a special needs beneficiary to enroll and attend an eligible institution would be allowed as well.
The Tax Cuts and Jobs Act of 2017 expanded 529 plan benefits to include tax-free withdrawals for private, public or religious K-12 tuition up to $10,000 per year. Again in 2019 with the SECURE Act, there was an expansion in use of college savings with apprenticeship program costs added as eligible expenses. In addition, up to $10,000 in a student’s lifetime can now be used to repay student loans.
As we approach the end of the school year, it might be a good time to reach out to us about your options to save for college or other educational expenses. We are always here to help.
Check in next month for Part II where we’ll provide info on options for unused savings in order to minimize taxation or penalty on earnings, if not used for qualified education expenses.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.