Safeguard Your Plan Assets
At some point, you’ll actually need to start spending the money you’ve set aside. You will need to think about preserving gains you may have made so that funds will be there when they’re needed. If your plan relies on an age-based investment strategy, this process is already in place and your asset mix has slowly evolved toward more conservative investments like money market funds and short-term bonds.
Now’s the time to sit down with all the contributing family members and your child and create a withdrawal plan that’s ready to set in motion. It’s a smart idea to spend from the plan in established increments, and withdraw wisely from your college savings plans, so you can reap the tax advantages and avoid mistakes along the way.
What Is A Beneficiary
A beneficiary is the future student, or the person you open the account for. You can open an account for a child, grandchild, friend, or even yourself. The only rule is that the beneficiary must be a U.S. citizen or resident alien with a valid Social Security number or other taxpayer identification number.
What Are Qualified Higher Education Expenses
- Tuition, fees, books, supplies, and equipment required to enroll or attend an eligible educational institution
- Computers, peripheral equipment, educational software, and internet access and related services
- Room-and-board expenses up to certain limits
- Expenses for services for a special needs beneficiary to enroll and attend an eligible educational institution Learn more.
- K-12 tuition expenses at public, private, or religious schools
- Payments on qualified education loans. This includes amounts paidas principal or intereston any qualified education loan of the beneficiary, or a sibling of the designated beneficiary. Withdrawals for loan repayments are limited to a total of $10,000 from all 529 accounts. Distributions to a sibling also have a $10,000 limit. However, the account owner cannot use 529 funds to repay a qualified loan and then use those same 529 funds to claim a tax deduction for student loan interest.
- Costs for registered apprenticeships, including fees, books, supplies, and equipment required for participation. To qualify, apprenticeship programs must be registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.
my529 also can help you save for graduate school and vocational school. Learn more.
Don’t Miss: Msi Keyboard Color Not Working
What Happens To A 529 Plan If Not Used
The 529 plan account can be transferred to a family member and used for qualifying education expenses. It may not be transferred to an IRA or other retirement account. The money may be withdrawn , but the growth that the money had over the life of the plan will be subject to a 10% tax and additional federal and or state taxes. The growth that the 529 plan made over its life will be taxed at the commensurate tax rate for federal and/or state taxes, and a 10% tax on top of that will be assessed. The 529 plans assets may not be subject to the 10% tax if the beneficiary has gotten a scholarship or the beneficiary has died, or become disabled. But in the circumstances of scholarships, death and disability, the amount withdrawn that is from growth from the 529 plan will still be subject to the state and/or federal taxes.
Qualified Expenses For A 529 Plan
A 529 plan only covers expenses that are related to education . However, there are rules. Most qualified expenses cannot exceed the cost estimates made by the school that the 529 beneficiary will be attending. Typically the schools financial aid office will mail this to students or post it on their website. For example, you can find the estimated cost of attendance for UCLA here.
K-12 education includes any kindergarten through 12th grade school – public or private. Note: only tuition is qualified up to $10,000 per year. Also notice that pre-K and child care are NOT eligible.
Post-secondary education includes college, university, trade schools, vocational programs, and registered apprenticeship programs.
Heres whats covered:
Tuition Tuition is a qualified expense for both full and part time students at accredited institutions. To be accredited simply means the college or university has passed standards set by a reviewing committee. While the majority of colleges are accredited be sure to ask the financial aid office ahead of time.
Room and Board If the student is attending college half-time or more and the room and board are paid directly to the college or university this is a qualified expense.
For example, using our UCLA estimated cost above, its estimated that it will cost $9,800 for room and board off campus. That means that you cannot use more than $9,800 per year from your 529 plan to be qualified.
Recommended Reading: How Do I Setup My Printer To My Laptop
What Happens If The Beneficiary Does Not Want To Continue His Or Her Education
In this situation, you have a couple of options. You can stay invested in case he or she decides to attend school laterthere is no age limit on using the money. Or you can change the beneficiary to an eligible family member of the original beneficiary.
You can also withdraw the money for other uses. However, a 10% penalty tax on earnings may apply if you withdraw the money to pay for nonqualified expenses.
How Can I Use The Money In A 529 Account
Your account can be used for any purpose but please note the following:
Federal tax issues: To qualify for federal tax-free withdrawals on earnings, the money must be used for:
- qualified higher education expenses for the beneficiary at an eligible educational institution ,
- expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school , of up to $10,000 per year per beneficiary,
- expenses for fees, books, supplies, and equipment required for the participation of a beneficiary in an apprenticeship program registered and certified with the Secretary of Labor , or
- principal or interest payments on federally qualified education loans of the beneficiary or a sibling of the beneficiary up to a $10,000 lifetime limit per individual
New York State tax considerations: To qualify for New York State tax-free withdrawals on earnings, the money must be used for qualified higher education expenses at an eligible educational institution. Under New York State law, distributions for K-12 tuition, apprenticeship expenses, and qualified education loan repayments are considered nonqualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.
Don’t Miss: Turn On Wifi On Dell Laptop
What If My Beneficiary Does Not Go To College
As the account owner, you always have control of your withdrawals. If the beneficiary chooses not to attend college, you have three options:
Keep the funds in the account. Since there are no age restrictions on the investments, they will be available in future years if the beneficiary changes his or her mind about school.
Change the beneficiary. You can change your beneficiary at any time without tax implications, provided that your new beneficiary is a qualified family member. You should consult your tax advisor to determine whether this may create a taxable gift.
Make a nonqualified withdrawal. Earnings will be subject to federal income taxes and any applicable state tax, as well as an additional 10% federal penalty unless you qualify for an exception to the penalty.
What Is A 529 College Savings Plan
Named after Section 529 of the Internal Revenue code, state-sponsored 529 plans are investment plans that receive special tax benefits. Also referred to as qualified tuition programs, 529 plans are specifically designed to help familiesregardless of income levelsave for college expenses such as tuition, books, and room and board. Investments grow tax deferred, and qualified withdrawals are federal tax free.
You May Like: How To Change Keyboard Color On Msi Laptop
Learn About Qualified Education Expenses
Your child might be focusing on first steps or Boy Scouts right now, rather than selecting a college major. One of the best things about a 529 savings plan is that it can be used to cover a lot when the time comes, including:
- Tuition and related fees for college, trade and vocational schools, community colleges, theological seminaries, international schools, study-abroad programs that run through U.S.-eligible schools and more. Any accredited institution should be able to accept funds from a 529 savings plan. Find a list of accredited choices on FAFSA.
- College room and board.
- Books and supplies, including textbooks, paper, pens or additional supplies required by specific classes .
- Computers and supplies, including laptops, printers, educational software and internet services.
- Certain apprenticeship program expenses.
- Certain student loan expenses .
- K-12 tuition . But withdrawals for K-12 expenses may not be exempt from state tax in certain states.
Recent Additions To The Qualified Expenses List
The Tax Cut and Jobs Act, passed in late 2017, added up to $10,000 in K-12 tuition per year to the qualified 529 expenses list. With the passing of the SECURE Act in 2019, apprenticeships registered and certified with the U.S. Secretary of Labor under Section 1 of the National Apprenticeship Act and qualified student loans were added to the list.
Hopefully, you are now more familiar with the ins and outs of qualified education expenses. While we cannot possibly go into a comprehensive discussion of all 529 withdrawal scenarios, and your favorite tax expert should be consulted for your specific situation, this general discussion will hopefully help you feel more comfortable about starting your 529 college savings journey
Also Check: Hard Reset On Hp Laptop
Use A 529 To Pay For Vocational School Community College Online Courses And Graduate Programs
Though many associate 529 plans with four-year colleges, they can be used to fund tuition and other educational expenses at a variety of post-secondary institutions and programs, including community colleges, trade and vocational schools, graduate schools, certain apprenticship programs and qualifying online course and degree programs. To determine whether a school or program is eligible for 529 spending, check with its admissions office or search the U.S. Department of Educations accreditation database. For distributions made after December 31, 2018, qualified education includes expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in certain apprenticeship programs.
Use A 529 To Pay For Elementary And Secondary School Tuition
Due to 2018 tax reforms, parents can use up to $10,000 saved in 529 accounts to pay tuition for children attending kindergarten through 12th grade.
Though the tax-free earnings on withdrawals used for such tuition expenses may not be very high parents are likely to spend their 529 funds on K12 tuition immediately, leaving little time for earnings growth the state tax deduction benefits may be worthwhile. Immediate state-level tax benefits are what will almost certainly draw more people who are paying private school tuition into 529 accounts. Any family paying private school tuition in a state offering 529 tax benefits would be foolish, financially speaking, not to make use of them, experts at the Brookings Institution said in a recent report. Tax-advantaged treatment applies to savings used for qualified education expenses. State tax treatment varies.
However, advisors and investors should do their homework before assuming that state-level tax benefits are guaranteed. According to Brookings, 16 states have argued that their 529 tax incentives do not apply to K12 expenses or havent yet determined whether they do. Qualified education expenses include tuition for an elementary or secondary private or religious school up to a maximum of $10,000 incurred during the taxable year per beneficiary.
Read Also: Spectrum App For Laptop
I Lose My Money If My Kid Decides College Isnt For Them
This is something that many people worry about when it comes to saving for school. What if you spend all that time saving, only for your child to decide that college isnt right for them? Thats okay! Every person has a different path for success, and that doesnt always mean college. That said, what happens to the money in your 529 plan if junior decides not to attend?
The good news is that the money in the account is still yours. You have several options if your intended student decides not to go to school. One option is rolling your account to another beneficiary. As long as the new beneficiary is still a member of your family, you can continue saving and use that money for school without skipping a beat. If you end up taking it out entirely, youll need to pay state and federal taxes on the earnings . Theres also an additional federal income tax penalty of 10 percent.
What Are The Tax Advantages Of A My529 Account
- Earnings accumulate deferred from federal and Utah state income taxes. Withdrawals are tax-free when used to pay for qualified higher education expenses, including K-12 tuition expenses, of your beneficiary.
- A Utah taxpayer who is an account owner, including a Utah trust, may take a Utah state income tax credit on contributions up to certain limits if the beneficiary was younger than age 19 when established as the beneficiary on the account.
- Utah corporations can claim a state income tax deduction for contributions up to certain limits.
- If the age 19 requirement is met, the account owner is eligible for the Utah state income tax credit or deduction for the life of the account each year a contribution is made. Learn more.
You May Like: How To Setup My Hp Printer To My Laptop
Can 529 Plan Savings Be Used To Buy A Computer Software A Car
When it comes to tax-advantaged investment funds, the rules about withdrawing the money can leave people confused.
In a recent column, I debunked five myths of 529 college-savings plans . But that myth-busting led to some follow-up questions from readers.
Can you use 529 funds to buy a computer? What about software?
Previously, you could use money from a 529 plan to buy a computer only if it was required by the college for attendance. That is no longer the case. Savings can indeed be used to buy a computer or pay for internet access as a qualified higher-education expense. An iPad used for college would also qualify, as would any related peripheral equipment, such as a printer. But software designed for sports, games or hobbies is excluded, unless it is predominantly used for educational purposes, according to the IRS.
Can 529 funds be used to buy a car to get to and from college?
Unfortunately not, says Gregg Wind, a certified public accountant who is a partner with Kallman, Thompson & Logan in Los Angeles. A car would be considered a non-qualified use of the funds. Transportation of any type is generally not qualified, he said.
My daughter received a full ride to Towson University in Maryland, so I have some extra money in my 529 plan that I would like to withdraw. She has just finished her junior year. What are the rules for withdrawing the funds?
Let me unpack these questions.
Is A 529 Plan Better Than A Savings Account
Generally speaking, the answer is yes, 529 plans are better than a savings account. Savings accounts generate almost no money in interest. 529 Plans generate more money as compared to savings accounts given that 529 plans are invested into various investment vehicles. The money earned over time is also tax free in 529 plans, if spent on qualifying education expenses. Savings accounts have the benefit of not being risky, but no upside in rate of returns. A properly oriented 529 plan portfolio can mitigate risk and earn more return, tax free, over time.
Also Check: How To Hard Reset Hp Laptop Without Password
A 529 Can Help You Save During Retirement
401s and IRAs are the most popular vehicles for retirement savings, but 529 plans can play a role, too at least for seniors who would rather spend their golden years in a classroom than on the golf course. That’s because 529 funds can be used to pay for college courses or continuing education classes at qualifying institutions. Here, once again, checking with an institution’s admissions office or searching the Department of Education’s database can help current and future retirees determine where they can spend their 529 funds.
I Can Only Use My 529 Plan For Schools In My Home State
Because 529 plans are operated by their individual states, some people have come to believe that they can only use their 529 plan for schools in their home state. Thats not the case. Students can use savings from a state 529 Account, like an NC 529 Plan, at practically any college in the country.
All thats required is that the school is an eligible higher education institution. This is a status that is determined based on if a school can participate in financial aid programs by the U.S. Department of Education. The school must also offer associate, bachelors, graduate or professional or other post-secondary credentials. In some cases, vocational and foreign institutions may be eligible.
Also Check: How Do I Stop Pop Ups On My Laptop
What It Means For Families
Normally, one person can only gift a total of $15,000 per year per person without incurring gift taxes. However, you can gift up to five years of the annual $15,000 exemptions at once when contributing to a childs post-secondary education. This is a great bonus for anyone who wants to gift in a lump sum.
Another bonus associated with 529 plans is that you arent restricted to using them in the state in which you reside. You will want to look for a plan that meets your objectives and goals, and you should do your due diligence on the plan itself and the fund managers.
Qualified tuition plans are sponsored by many states, state agencies, and educational institutions. Shop around to find one that fits your needs and budget the most.
In its most recent survey of college pricing, reports for the 2020-21 academic year showed that the average cost of tuition and fees was $37,650 at private colleges, $10,560 for state residents at public colleges, and $27,020 for out-of-state residents attending public universities.
Those numbers are in todays dollars, so if you’ve recently had a baby and youre looking at college costs that are 18 years away, those prices may increase significantly.