Get Back to School with 529 Plans

As summer comes to a close and as your children and grandchildren start returning to school, let’s revisit a popular education savings vehicle that you could potentially utilize to help support your education goals for your children, grandchildren or even nieces and nephews.

Within a 529 plan, education savings grows tax-deferred, meaning that dividends and earnings while the funds remain within the 529 account are not taxed, and withdrawals are tax-free if they are used for Qualified Education Expenses.

What are Qualified Education Expenses? The IRS clarifies what Qualified Education Expenses are on their website here: https://www.irs.gov/credits-deductions/individuals/qualified-ed-expenses They are the amounts paid for tuition, fees and other related expenses for an eligible student required at an eligible institution.  There are some nuances.  Expenses for books, supplies and equipment needed for a course of study are included even if it is not paid to the school (the largest of these would likely be textbooks).  Additionally, you must pay the expenses for an academic period that starts during the tax year or the first three months of the next tax year.

You should be careful to note that there are expenses that are not eligible. Insurance, student health fees, bus passes and other forms of transportation expenses are not eligible for 529 money. In the case of room and board, the costs cannot exceed the greater of the following two tests:

1.       Allowance for room and board included in the school’s cost of attendance for federal financial aid calculations.

2.       The actual amount charged if the student is living in housing operated by the education institution.

Sometimes, as in the case of my experience at Texas A&M University, the university may bill you in aggregate of some qualified and some non-qualified expenses. It can make it operationally difficult to pay the university directly from your 529 plan. Reimbursing yourself may be an easier way to allocate your qualified and non-qualified expenses. You do not need to provide the 529 plan with evidence of your expenses, but you should keep receipts of the qualified expenses for your tax records.

We think of 529s as college vehicles alone, but as part of the 2017 Tax Cut and Jobs Act, you can now utilize 529 accounts for private, public, or religious K-12 school tuition. However, this is limited to up to $10,000 per year.

Who can you establish 529 accounts for?

• Son or daughter and stepchildren

• Sibling or stepsibling

• Parents or stepparents

• Niece or nephew

• Aunt or uncle

• Grandchildren

• In-laws (father, mother, sibling)

• First cousin

What are some use cases?

• Pay for family member’s tuition or qualified education expenses to an eligible university

• Pay for a family member’s private school K-12 education, limited to $10,000 per year per beneficiary

• Roll residual 529 balances toward next generation via changing the beneficiary

• Roll residual 529 balances toward a Roth (https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth)

• Non-qualified withdrawal (earnings on principal subjected to income taxes and 10% penalty)

These are not meant to be exhaustive lists. If you find yourself interested in supporting the education of your children or grandchildren, a 529 plan account may be a good solution for you.  If you would like to talk in more detail about education savings or education savings as part as on overall financial plan, please feel free to reach out to us at michael@kingspath.com or info@kingspath.com to discuss how we can assist you in developing a plan to support your family’s education goals.