529 Education Savings Plan

529 accounts are used for individuals to save for a beneficiary’s education expenses. 529s are funded with after-tax dollars that grow tax-deferred and if they are used for qualified education expenses the funds come out tax-free. 529 plans are state-sponsored plans. Nearly every state has its own specific state-sponsored plan. Each state-sponsored 529 plan comes with different nuances, different investment choices, rules, state deduction, amounts etc. You are not limited to choosing the state plan where you live, but it is important to understand the rules around the 529 plan that is chosen.

Benefits of a 529 plan-

  • Allows dollars to accumulate and potentially grow tax-free through investments in order to pay for future expenses
  • The possibility of state tax deduction of dollars funded to a state-sponsored 529 plan
  • Allows for budgeting and planning of future college expenses.
  • Funds can be transferred from one beneficiary to the next if the funds are not used

Qualified Education Expenses-

In order to keep the tax incentives of a 529 education plan, the funds must be distributed for qualified education expenses. Qualified education expenses include:

  • Tuition – For both full and part-time students at accredited institutions.
  • Room and Board – A student must be enrolled in at least half of a full schedule at the accredited institution and the funds are paid directly to the institution for that room.  IF the room and board portion are to be paid to a landlord- the rent paid cannot be higher then the institutions cost of living on campus.
  • Technology items- computers, printers, and software for the class.
  • Books and supplies
  • K-12 expenses- As of 2018, you can now use 529 plans to pay for K-12 tuition to a private school. You can withdraw up to $10,000 a year to pay for private school tuition.

Pitfalls: If you use the money for a different reason then a qualified education expense, there are some penalties for doing so. You must pay federal and state taxes on any investment gain in the account along with a 10% penalty on that gain. Also, if you have received a state tax deduction you may also have to pay that deduction back. You will receive the basis (after-tax dollars you put in) back without penalty or further taxation.

529 education plans can be difficult to set up and use properly. Please make sure you contact your Financial Advisor and Tax Consultant to make sure you are setting them up properly and using them to their full benefit. If you have any questions about 529 education plans please give me a call at 913-681-9155 or email me at taylor@engageadivsors.com .

Engage Advisors, LLC is a Registered Investment Adviser. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Engage Advisors, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Engage Advisors, LLC unless a client service agreement is in place.