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As families across the country search for ways to save for their children’s growing higher education costs, more and more people are turning to 529 college savings plans. Over the course of 2020, total assets in 529 plans increased 18% to a record high of $394 billion, according to data from Morningstar.
If you’re thinking about investing in a 529 plan, but inevitably have questions about how they work, here are answers to some of the most frequently asked questions.
Disclosure: Before making any decisions about RMDs please consult with a financial professional.
What is a 529 college savings plan?
A 529 college savings plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary.
These plans allow participants to save money in an account in which the earnings will grow free from federal income tax and – when used to pay for qualified expenses, expenses up to $10,000 in student loans, and/or expenses related to certain K-12 tuition expenses – may be withdrawn federal income tax-free.
In many states, a participant can receive special incentives, including:
- State tax treatment that mirrors the federal tax treatment,
- Tax deductions/credits, and/or
- Other state tax benefits, based on participation in their state’s program(s).
Read our full article, What is a 529 College Savings Plan?.
What are “qualified higher education expenses”?
Qualified higher education expenses include:
- Mandatory fees
- Equipment required for enrollment or attendance
Room and board expenses are also eligible for students enrolled half-time or more based on the current allowance for room and board, determined by the eligible educational institution for federal financial aid purposes, or actual invoice amount charged by the institution to the beneficiary, if greater.
Qualified higher education expenses also include expenses of a special needs beneficiary that are necessary in connection with his or her enrollment or attendance at an eligible education institution.
Who can open a 529 plan?
Anyone* can open and fund a 529 plan – the student, parents, grandparents, other relatives or friends. There are no income restrictions.
*To open the account, you must be a US resident, age 18 or over, with a US mailing and legal address, and a Social Security number or Tax ID.
Who can be a beneficiary on a 529 plan?
Generally, anyone can be named the beneficiary of a 529 account, regardless of their relationship to the person who opens the account. The only requirement is that the beneficiary must be a US citizen or a resident alien, and must have a Social Security number or Tax ID.
Can a beneficiary have more than one 529 account?
Yes. Since only one account owner can be named per account, family members or friends can choose to open their own account for the same beneficiary.
What if the beneficiary doesn’t go to college?
You have several options available if the beneficiary decides not to go to college:
- You can change the beneficiary to a member of the beneficiary’s family.
- You can defer the use of your savings and leave contributions invested in the account.
- You can withdraw the assets in your account for a non-qualified distribution. Earnings – but not contribution amounts – would be subject to state and federal tax plus a 10% federal tax penalty on the earnings. Some plans may charge additional fees or penalties on non-qualified distributions.
What if the 529 beneficiary receives a scholarship?
The beneficiary can use the funds to pay for expenses not covered by the scholarship, such as room and board, books and other required supplies.
Does the 529 beneficiary have to go to an in-state school?
No. 529 funds can be used at any eligible educational institution to pay for qualified higher education expenses. That includes four-year colleges and universities, qualifying two-year associate degree programs, trade schools and vocational schools – both at home and abroad.
Can a 529 be used for tutoring?
Unfortunately, paying for tutoring for a child is not considered a qualified educational expense for a 529 plan.
I have a 529 account for my child with funds in it, but they have no more plans for education. What can I do with the money?
There is no time limit on when a 529 owner has to spend 529 funds. Here are some options you have:
- You can withdraw the money and pay income tax on the earnings portion of the sum and a 10% penalty.
- You can name another beneficiary to the account such as another child, sibling, niece, nephew, spouse, etc.
- You can keep the funds in the account in case the beneficiary eventually wants to go to graduate school or pursue some other educational opportunity.
- You can keep the funds in the account in case the child ultimately has his or her own child and the beneficiary can be switched to the grandchild.
- You can use the money to pay up to $10,000 lifetime on student loans. The portion of student loan interest that is paid for with 529 funds is not eligible for the student loan interest deduction.
How can I change the beneficiary on a 529 account?
Contact your 529 plan to determine the specific forms and requirements necessary to complete this process.
Depending on the relationship of the new and old beneficiaries, changing the beneficiary of an account may trigger a taxable event, which could also include a penalty, gift tax or both.
Do 529 plans guarantee college admission?
No. The prospective student is still required to meet entry requirements.
Begin your journey of mastering the college admissions process with Bautis Financial. Whether you’re a parent or guardian, student or school counselor, book a free consultation to discuss how our financial advisors can be a college planning resource.