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How to Use your 529 College Savings Plan
How to Use a 529 College Savings Plan
As with any investment there are benefits and drawbacks to contributing to a 529 college saving plan. By now you likely have heard the benefits for contributing to a 529 college savings plan from advertisements or advisors. Are there any drawbacks? What can the account be used for? How to withdrawal and avoid a 10% penalty tax.
What qualified distributions are allowed under the 529 plan? The plan allows for tuition, required fees, supplies, and room & board.
TUITION AND CLASS FEES are generally allowed for universities, trade schools, and vocational programs. This can be verified by calling 1-800-433-3243 to verify that the institution is eligible for federal financial aid as a qualifier. A distribution is also allowed for a full time student receiving scholarships. The amount of scholarship can be drawn penalty free in addition to the remaining tuition and fees.
A portion of 529 earnings from 529 investments can be considered taxable based on educational tax credits, grants, and provided assistance. This taxable amount will be included in the account owner’s income but have no additional penalty attached.
BOOKS, SUPPLIES AND EQUIPMENT are eligible if they are required for enrollment. For an easier time in record keeping, it is wise to purchase required items separate from college clothing or optional supplies. With a lot of colleges are moving toward electronic books and course load, a computer is starting to become a required piece of equipment.
ROOM AND BOARD costs are qualified if they are the amount the school includes in its "cost of attendance" figures for federal financial aid purposes.
If the student is living in campus-owned dormitories, the amount you can include is the amount the school charges for its room and board.
If your student is living off campus, ask the financial aid department for the room and board allowance for students or living elsewhere off campus. Unless the parents are reporting rental income from the student, the withdrawal for living with parents is not possible.
WHAT HAPPENS TO MY 529 PLAN IF THE ACCOUNT BENEFICIARY DOES NOT ATTEND COLLEGE?
There are a few options if plans change, the beneficiary does not attend college or extra money is left after graduation. The limited options for non-educational withdrawals are waiting for future education costs, a rollover to another beneficiary, and non-qualified withdrawals.
If waiting is the best option, the funds will continue to grow tax-deferred. The beneficiary who chose not to go to college might change his or her mind and decide to enroll or additional funds may be used later towards a graduate program. Continue to monitor the plan’s performance and expenses to determine your course of action. There are options to change a poorly performing plan.
Another strategy is to change beneficiaries. The transfer can be tax free if the beneficiary is related to you in the same generation as the beneficiary, such as transferring between siblings. You can also transfer the account beneficiary to the next generation, such as grandchildren.
The last option is to have the account owner withdraw the leftover funds. This will allow immediate access to the account balance but will pay a 10% penalty tax on top of being included in your taxable income. The penalty tax is based on the dollar amount withdrawn, compared to just the gain being taxable under qualified distributions.
Please contact our office, at 513-868-8600 for additional information about your unique situation. It is easier to handle a tax issue before it happens.