529 College Savings Plans
Save for college with these tax advantaged plans. If you are a parent, relative, or family friend you can save in a 529 for a future college students education.
What can a 529 plan be used for?
529 plans allow tax-free growth and withdrawals when and if the money is used for qualified education expenses. For colleges and universities, these expenses can include fees, tuitions, supplies, etc.. 529 plans also allow for tax-free withdrawals of $10,000 (maximum) per year per beneficiary for expenses regarding educational institutions K-12.
These distributions can also be used to pay back student loans, both federal and private.
529 College Savings Plans
These programs provide tax-advantaged ways to save for education.
Regarding a 529 plan, savings can grow quicker since you are deferring taxes on any investment earnings. Additionally, the distributions from a 529 are used for eligible expenses, and you don’t pay federal taxes.
In general, 529 plans provide tax-advantaged ways to pay for education and supplies. Each state has specific rules and regulations, and some states offer tax benefits to their state residents, but you can choose any state’s plan that you like.
What is not covered by a 529 plan?
The flexibility of 529 plans is appealing, too- you can withdraw funds for any reason. The downside is that the earnings portion of a non-qualified distribution will have to be taxed as income. Additionally, there will be a 10% tax penalty (some exceptions apply).
Typically, for college or university students, expenses necessary for enrollment in an eligible program are covered. The IRS doesn’t always see the same expenses as necessary that we do. For instance, health insurance and transportation are not covered unless the institution includes these costs in the tuition fee.
Are 529 plan contributions tax-deductible?
Contributions made to a 529 program are post-tax and not deductible on federal income taxes. Some states will allow state income tax deductions or credits for these plans. If you choose to do this, you will need to participate in your home state’s 529 plan.
529 funds grow tax-free and do not get taxes when making withdrawals for qualified expenses.
What are qualified education expenses for a 529 plan?
For students attending a college, university, or other eligible post-secondary educational institutions, the following are considered qualified education expenses:
- Tuition and fees
- Books and supplies
- Room and board (for students enrolled at least half-time)
- Computers and related equipment
- Internet access and special needs equipment
529 plans offer tax-free distributions of up to $10,000 per year, per beneficiary, to pay for K-12 tuition expenses at both private and public schools. Additionally, this type of plan allows tax-free distributions for student loan repayments up to $10,000 per borrower (lifetime limit) for the beneficiary and the beneficiary’s siblings.
The earnings portion of a non-qualified distribution will have to be taxed as income. Additionally, there will be a 10% tax penalty (some exceptions apply). However, since contributions were made with after-tax funds, they will not be subject to taxes or penalties.
Can I use a 529 plan to pay for rent?
Suppose you are at least enrolled part-time, then yes, since this is a qualified educational expense. Part-time enrollment is typically at least 6 credit hours per semester.
- On-campus students: rent expenses cannot exceed the amount charged by the school.
- Off-campus students: rent expenses are determined by the “cost of attendance” figures provided by the school’s Office of Financial Aid.
How do I use my 529 plan?
When you take withdrawals from your 529 plan, you can typically send the payments directly to the account holder, beneficiary, or the school. Sometimes, these payments can be made right to a landlord or other third party. Your 529 plan will have more detailed information.
Remember that you might need to report contributions and distributions from your 529 on your tax return.
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What happens if my child doesn’t use the 529 plan?
If the funds from a 529 remain unused, you will pay income tax and a penalty only on the earnings portion of your non-qualified withdrawal. You can avoid the penalty charge (still subject to state income tax) if the beneficiary:
- attends a U.S. Military Academy
- Received a tax-free scholarship
- Dies or becomes disabled