What can a 529 be used for?

What can a 529 be used for?

February 11, 2021

Here are 6 ways to put a 529 plan to use:

College 529 Savings Plans known as “529’s” are savings plans designed to encourage saving for future education costs, like college tuition. 529 plans, legally known as “qualified tuition plans,” are sponsored by states. Earnings in 529 plans aren’t taxed under the federal tax code and withdrawals for eligible expenses are tax-free and many states also allow 529 contributions to be deducted from state income taxes, although not in Tennessee. If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

1. Qualified Expenses may include tuition and room and board. Additionally, mandatory fees charged and books required by the institution are also considered qualified expenses.

2. Technology and internet access can be 529 qualified expenses. In the digital age, education and technology go hand in hand. Fortunately, 529 withdrawals can cover “the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access,” according to the IRS. Such equipment includes printers, but not equipment that is intended mainly for entertainment purposes. Computer software used for educational purposes is also covered.

3. 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 apprenticeship 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 Education’s accreditation database. Qualified education includes expenses for fees, books, supplies and equipment required for the participation of a designated beneficiary in certain apprenticeship programs.

4. Use a 529 to pay for elementary and secondary school tuition. Qualified education expenses include tuition for an elementary or secondary private or religious school (kindergarten through 12th grade) up to a maximum of $10,000 incurred during the taxable year per beneficiary. There are 16 states that do not recognize the K-12 expense withdrawals as tax free and those states currently include: California, Colorado, Illinois, Minnesota, Montana, Nebraska, New Mexico, New York, Oregon and Vermont. Refer to your tax professional for laws in your state.

5. 529 plan contributions are tax-advantaged gifts. Whether it's for a birthday, a holiday or for no reason at all, relatives and friends can use 529 plans to give gifts to the children in their lives. Grandparents, aunts and uncles or anyone else wishing to help fund a child's education may contribute to an existing 529 account or open a new one and name the child as the beneficiary. In many states, those contributions can be deducted from state income taxes, although not in Tennessee. Gift givers should remember that contribution limits per year on the 529 are $15,000 per donor per beneficiary which coincides with the annual gift tax exclusion of $15,000 for single filers and $30,000 for married filing jointly. Under a special election, you can invest up to $75,000 ($150,000 for married couples) at one time by accelerating five years' worth of investments. This might be an especially attractive option for those intent on minimizing future estate taxes or anyone contributing cash to a student who could use the funds right away.

6. Roll 529 savings into an ABLE account to pay for disability expenses. Achieving a Better Life Experience (ABLE) accounts were established in 2014 to allow people with disabilities and their families to save money for disability-related expenses. Earnings in ABLE accounts grow on a tax-deferred basis and can be withdrawn tax-free for eligible expenses such as housing, transportation and assistive technology. Like traditional 529 accounts, ABLE accounts can also be used to cover education expenses. Tax-advantaged treatment applies to savings used for qualified disability expenses. State tax treatment varies. If withdrawals are used for purposes other than qualified disability expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

This content is developed from sources believed to be providing accurate information, and provided by Criterion Capital Advisors and Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.