As a mom and someone who values education, I wanted to save for my children’s future. While there are many options to save for school, we chose the 529 plan when our children were born for the tax efficiency and focus on education.
Over the last few years, changes in the education environment and updates to how 529s can be used have brought up many questions from my clients. Let’s dive into some of the changes.
The learning environment
During the COVID-19 pandemic, colleges and universities switched to online classes, or at least to a hybrid of in-person and online. And even before the pandemic, many schools offered remote classes, though obviously not to the same extent. But after COVID-19 subsides, it’s likely that the online component will remain an important part of higher education. What does this “new world” mean for you, when you’re saving for college? Will a 529 plan still be relevant?
In a word, yes. First of all, a 529 plan can offer tax advantages. Earnings in a 529 plan are federally tax-free, provided the money is used for qualified educational expenses. And if you invest in your own state’s 529 plan, your contributions may be tax deductible.
Online learning costs are eligible for a 529 plan’s tax benefits just as much as those incurred from in-person classes. Tuition, textbooks, supplies, computers and services — all of these should qualify, assuming the school meets certain criteria. Also, students enrolled half-time or more don’t have to live in a dorm for room and board expenses to be covered by a 529 plan — they can live in off-campus housing. However, these room-and-board costs typically must equal the cost of living on campus. Some schools identify a specific cost for “commuters” or “at-home students,” so you will need to contact the college directly to determine qualified room-and-board costs.
Updates to 529 plans
Now, let’s take a quick look at what some changes in the rules governing 529 plans over the past few years might mean for you. Eligible expenses from a 529 plan include:
K-12 expenses: Parents can withdraw up to $10,000 per student, per year, from their 529 plan to pay for tuition expenses at elementary and secondary schools. If you intend on sending your children to a private school, this use of a 529 plan might interest you. Apprenticeships: 529 plans can be used to pay for fees, textbooks, equipment and other supplies connected to apprenticeship programs registered with the Department of Labor. These programs, typically offered at a community college, combine classroom instruction with on-the-job training.
Student loans: Families can withdraw funds from a 529 plan to repay the principal and interest for qualified education loans, including federal and most private student loans. There’s a lifetime limit of $10,000 for student loan repayments per each 529 plan beneficiary and another $10,000 for each of the beneficiary’s siblings.
All of these newer uses of 529 plans may contain additional guidelines and exceptions, and state tax treatment varies. You’ll want to consult with your financial team, including your tax advisor, before taking money from your account.
The core importance has not changed
What hasn’t changed with 529 plans is how they can be used by parents, grandparents, family and friends to help save for a child’s education, even as a part of wealth transfer and estate planning. It’s valuable for you to know the different ways you can put a 529 plan to work for your family and your finances.
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Caitlin Davis, CFP®, AAMS®
Financial Advisor, Edward Jones