It’s that time again, school bells are ringing, and higher education is calling once again. You are
packing up your child to head to college… or your dining room table? COVID-19 has changed the method by which your child might be going back to school or how they will be learning, but one thing is staying consistent, tuition and fees will still need rendered. With the SECURE ACT recently changing some of the capabilities of your 529 funds and tuition bills coming due, we thought it would be an excellent time to review six things your 529 plan can do for you.
1. 529 FUNDS ARE FOR MORE THAN JUST TUITION AND BOOKS
Assets in 529 plans are available for a variety of expenses outside of just tuition and books.
The following is just a small list of additional costs that qualify, computers, internet access,
equipment and supplies, required course fees, and room and board (if you are enrolled at
least part-time). Things expressly excluded are parking costs, fees for elective activities, and
entertainment costs. Develop a good habit of asking yourself every time a school-related
expense occurs you ask yourself, “Can I use my 529 plan for this”.
2. MORE THAN ONE PERSON CAN BENEFIT FROM 529 FUNDS
You have the option to change beneficiaries of any 529 plan at any time. Are there leftover funds in a 529 plan from an older child that already finished school? Change the beneficiary to yourself and take some classes at the local community college. Have younger children who will also need funds to go to school? Change the beneficiary to them when it is their time to attend school. Do you have a favorite niece or nephew that you want to help? You can change the beneficiary to them as well.
3. ADD MONEY TO YOUR 529 PLAN AT ANY TIME
One of the most common advantages parents may overlook is the ability to contribute to a 529 plan as the student is approaching college, or even in college. In Ohio, you can deduct up to $4,000 off your state taxes for contributions to the 529 plan with an unlimited carry-forward. State-sponsored 529 plans are conservative by nature with all plans offering a conservative bond, certificate of deposit, or cash-like investment option that make contributions to the plan safe and tax-efficient.
4. SECURE ACT CHANGES EXTEND CAPABILITIES FOR 529
Now you can use your 529 plan funds for apprenticeship programs. Think cosmetology or learning a trade. The program does have to be accredited; you can find a list of accredited programs at https://www.apprenticeship.gov. You can now use up to $10,000 annually for private K-12 education from 529 plans (some states have not ratified this change, so make sure your state allows this). You can also now use up to $10,000 to pay for student loans. Most loans qualify for this payback option, and you can also pay up to $10,000 on student loans for each sibling. Keep in mind this $10,000 is a lifetime limit for each individual, and no additional 529 funds can be used to pay down student loans. Also, should you select this option, you cannot double-dip and take the student loan interest deduction from your federal tax return should you qualify.
5. SAVING IN A 529 PLAN DOES NoT HAVE TO BE DIFFICULT, CONFUSING, OR SCARY
Many parents face information barriers when it comes to starting a 529 plan for their children. How do I get started, how and where do I add contributions, what should I invest it, how will this change my taxes, what if my child doesn’t go to school, and many more unknowns that prevent participation in a 529 plan. Each state has its version of a 529 plan available for you to use, and most states offer residents a tax incentive for making annual contributions. You can make ongoing deposits or lump-sum contributions at any time. Age-based investment options a great way to manage risk as your child nears college entry. And individual investment options provide the flexibility to regulate the amount of investment risk within the account based on each family’s situation.
6. SCHOLARSHIPS AND 529 PLANS
One of the most common questions we get is about scholarships and how they affect the 529 savings. As a quick tutorial on how 529 plans work, it is tax-free money deposited into your 529 plan that grows tax-free, and you get to withdraw that money tax-free to use for school expenses. If you withdraw those funds and use them for other purposes other than the school, you will have to pay taxes on the gains and a 10% penalty. The good news is that if your child earns a scholarship, you can withdraw the amount of the scholarship award from your 529 plan without paying the 10% penalty on the earnings. You will still have to pay taxes on the gains, though.
Despite the advantages of 529 plans, just 30% of college savings are held in these state-sponsored programs, according to How America Saves for College, a 2018 report from Sallie Mae. General savings accounts are the most used account type by parents. In a similar report by Sallie Mae, 51% of college savers have not heard of 529 college savings plans, and 74% of individuals earning less than $35,000 say they have not heard of 529s compared with 35% of individuals with an income of more than $100,000. These plans are available to everyone, are easy to use, and are an excellent way to save for your child attending private K-12, college, and now vocational school. With any financial planning topic, every individual’s situation varies. If you or anyone you know has questions or wants to discuss implementing or modifying a current 529 savings strategy, feel free to contact Columbus Street via email or schedule a time to talk. Conversations are always complimentary and, of course, at no obligation.