Paying For College:New Rules for 529's

Many parents are thinking ahead and saving early for their children’s education. One great way to do so is through a 529 Savings Plan. The 529 plan is an account that allows investments to grow tax-free as long as the distributions from the account are used for qualified education expenses. This means if you deposit $1,000 into an account and it grows to $10,000, the $9,000 gain is not subject to capital gains or income tax if the funds are used for qualified expenses. With this kind of tax deferral, these can be powerful savings vehicles for your family. Let’s look at some common questions that people have about these accounts.

Who can fund a 529 Plan? ‍

Any US Resident can fund a plan for anyone with a Social Security Number.

You can fund a plan for your children, grandchildren, niece and nephew, your neighbor, your bother, even yourself. As long as you follow the rules of the plan. ‍

How much should I put into the Plan? ‍

The simple answer is, it depends. Often plan sponsors worry about over funding an account and the funds not being used. One method we like to use is funding 80% of the average 4-year cost of college. Your child may go to a trade school, in-state public school, or receive a scholarship which can reduce the total cost. The 80% method can reduce worries over funding while still setting a large goal.  

An example:
College 4 Year Average: $38,270 x 4 years = $153,080

$153,080 * 80% = $122,464 ‍

What if I have money left over in my current Plan? ‍

If you do have money left over in a 529 Plan you have options. Here are some examples:

Option 1: Transfer the beneficiary

• The beneficiary of the 529 plan funds is not permanent. If you have other children or grandchildren who could benefit, you can update the beneficiary on the account so that another recipient can benefit.

Option 2: Use the money for student loans

• A recent update to 529 Plans is being able to pay off student loans. Up to $10,000 in qualified loan repayments can be made per plan beneficiary.  

Option 3: Rollover up to $35,000 into a Roth IRA

• For those looking to kickstart their beneficiary’s investments, consider rolling the remaining funds into a Roth IRA. The Plan beneficiary can receive up to $35,000 tax free into the account. There are strict rules on this process, but it is a great way to liquidate older Plans (15 year minimum).

If you would like to learn more about how a 529 Plan could benefit you or your family, we are happy to help you plan.

Links to help you learn more!