Tuesday, September 27, 2022

What Does The 529 College Savings Plan Cover

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Should You Use 529 Plan Money To Pay The Cost Of Studying Abroad

WHAT’S A 529 COLLEGE SAVINGS PLAN & HOW DOES IT WORK???!!

This is an important question and finding the answer starts with analyzing the cost of studying abroad. The cost largely hinges on three things:

  • The location of the host school
  • The length of your student’s stay
  • Who’s sponsoring the program

If your student is enrolling in a study abroad program through their home university, they’ll effectively pay the same for tuition, fees, and room and board at their host school as they would at home. If they’re enrolling through the host school, however, the school determines the cost of attendance. Study abroad programs can also be sponsored by third-party companies, which charge their own fees.

When there’s a choice between studying abroad through the home school, paying the host school’s rates, or going the third-party route, it’s important to do a cost comparison. If your student’s home school comes with a significant tuition bill, for example, and the host school is offering a much lower rate, it might make sense to reserve 529 plan money for expenses at their home school and pay for study abroad another way.

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.

Roth Ira Vs 529 Plan: Which Is Better For You

Choosing a better option between a 529 plan and a Roth IRA may be difficult for you. But instead of leveraging them, why dont you take advantage of combining both, provided you can afford them. This is a good investment strategy and your kids will thank you when they graduate without the financial burden of excess student loans.

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Expenses That You Think Might Qualify But Dont

There are also expenses that you might think qualify for 529 plan distributions, but youd be surprised to learn that they dont.

Transportation and Travel If your child is going away to school, youre going to inevitable deal with transportation and travel expenses. You need to move them in, move them home, and youre likely going to fly them home for holidays and vacations. Plus, if you’re using a 529 plan for overseas school or study abroad, Visas and other travel are as not qualified. So you cant use your tax free 529 plan money for these.

General Electronics and Cell Phone Plans Cell phones are an everyday part of life. As such, they are not considered an education expense, and while necessary, they cant be expensed and paid for with your qualified distributions from your 529 plan.

Sport and Fitness Club Memberships Many colleges offer sports or fitness clubs for their students to use, and they typically charge a small monthly fee. And even though the college or university bills this expense, its not considered an education expense. Since its not an education expense, you cant use your qualified 529 plan money to pay for it.

What You Can Pay For With A 529 Plan

529 Plan

First off, lets dive into the qualified expenses of a 529 plan.

Money invested in a 529 college savings plan grows tax-deferred, and qualified distributions are tax-free. Families may also be eligible for a state income tax deduction or credit for 529 plan contributions, depending on where they live .

Qualified higher education expenses include costs required for the enrollment or attendance at a college, university or other eligible post-secondary educational institution. The definition of qualified higher education expenses also includes up to $10,000 per year in tuition for K-12 schools and up to $10,000 in student loan repayments .

Here is a list of common educational expenses and their qualification status:

Type of expense

Yes, with a lifetime limit of $10,000

Wondering how your 529 plan may impact financial aid? Use our Financial Aid Calculator to estimate the expected family contribution and your financial need.

Its worth noting the rules for some of these expenses are a bit more complicated than others.

To help you understand exactly what you can pay for with a 529 plan, lets break down each expense.

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Plan Ahead529 Account Funds May Conflict With Other Tax Incentives

The federal government offers additional tax incentives to help ease the burden of some college expenses, but unfortunately, you won’t be able to use a 529 account to cover those same expenses. If you do, the IRS will consider it double dipping, so you’ll want to factor in whether you’ll be claiming this tax credit when deciding how much to withdraw from your 529 account. These tax credits may also affect your childs eligibility for financial aid.

Below are the 2 most common tax credits. Remember, a credit goes directly against your tax liability, which is different from a deduction. Only one credit can be claimed for a student each year.

  • American Opportunity Tax Credit allows families of undergraduates to deduct the first $2,000 spent on qualified education expenses and 25% of the next $2,000. To qualify for the full credit in 2019, single parents must have a modified adjusted gross income of $80,000 or less, or $160,000 or less if married and filing jointly. The total credit cannot exceed $2,500 per tax year and the credit can be claimed for only 4 years.
  • Lifetime Learning Credit provides up to a $2,000 tax credit on the first $10,000 of college expenses so long as your modified adjusted gross income is $68,000 or less in 2019 for a single filer, or $136,000 if married and filing jointly. There is no limit to the number of years this credit can be claimed.

Beyond 529s: Another Way To Save For Education

If you want to set aside money for lessons or other educational activities that a 529 account doesnât cover, you could consider a custodial account under the Uniform Gifts/Transfer to Minors Act . âHowever, there are potential drawbacks to that strategy,â Polimeni notes. âThese gifts canât be taken back and you canât transfer assets between beneficiaries. Whatâs more, once the child you designate as beneficiary reaches a certain age â which varies by state â he or she will be free to spend the money for purposes other than education.

If thatâs a concern, you may decide youâre better off using a typical savings account to earmark money for educational goals that a 529 account doesnât cover. Also, any gifts made to a UGMA/UTMA account or a 529 account could count against your federal gift tax annual exclusion amount, so you should coordinate your gifts appropriately. Your financial advisor can help you figure out what makes the most sense for your family.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions

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How Do You Withdraw Your 529 Plan Funds

Depending on your states plan, there are typically several ways to withdraw your 529 plan money. For example, Scholarshare allows you to request a withdrawal online, by mailing in a form via snail mail, or by calling their call center.

You can have the funds sent to the participant, the beneficiary, the school directly, or a third-party. Many 529 plans, including Scholarshare, allow for ETF transfers as well, which can speed up the process dramatically.

When you take a withdraw, you are not required to provide any proof of whether the money is being used for qualified or non-qualified expenses. However, you are required to declare it to the IRS when you file your taxes, and so its important to maintain accurate records should you need them.

College Savings Plan Guidelines

529 Plans Get Better

From the results, we can conclude that the goal for most people saving for college should be to have between $37,328 and $245,427 saved in the account. This is a huge range, no doubt. But remember what “low end” and “high end” mean.

The low end amount is for someone that wants to help their child pay for a public 4-year school. The high end amount is for someone that wants to fully pay for a 4-year private education for their child.

Parents should also remember that, even when saving for private school, many students who attend private schools get discounted tuition, or receive scholarships to offset the “real” tuition price. So, even that high end number might not make sense when saving for college.

In this scenario, the low end 529 plan will be able to pay out between $9,600 and $10,000 per year, for each of the 4 years of school. Given that the college costs will rise, that should be about 50% of a 4-year public school tuition in 18 years.

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Roll 529 Savings Into An Able Account To Pay For Disability Expenses

Achieving a Better Life Experience 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.

But sometimes parents who have started traditional 529 accounts for their children realize only later, after a childs disability diagnosis that they would really benefit from an ABLE account. Fortunately, the Tax Cut and Jobs Act offers them some relief: 529 account holders can roll their funds into ABLE accounts up to the annual contribution limit of $15,000 until January 1, 2026. A 529 account can be rolled into an ABLE account for the same beneficiary or for a different beneficiary within the same family. For instance, a family may roll money from a 529 account benefiting one sibling into an ABLE account benefiting another sibling.

Flexible Spending On Education

Not sure what your kid will wind up doing? A 529 still offers flexibility. You can pay for more than just a traditional four-year college degree.

Take, for example, the Taylors young ballerina. Her 529 is paying for books and lab fees for the online university.

You can use a 529 for trade school, a certificate program, community college, even graduate school, says Gorrell. Whether its cosmetology or the culinary arts, a 529 can fund it, so long as the specific school or program accepts federal financial aid. The U.S. Department of Education website includes an extensive list of the programs and schools that accept federal financial aid.

According to the 529 plan rules, theres also no deadline for using the funds in a 529. So anything left over after college can be used for post-graduate education, whether thats graduate school or other training.

Lastly, you can use the money in a 529 to send your student to school in any state. You dont have to live there or have your 529 plan based there, says Gorrell.

Consider this: Your oldest child gets a lot of merit aid. He doesnt need to use all the money in his 529 savings plan. Meanwhile, your youngest child gets no merit aid and doesnt have enough money in her 529.

Solution? You can transfer funds from one 529 to another, whether that is a sibling or other qualifying relatives, like nieces, nephews, and even a parent, says Gorrell.

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Key Benefits Of A 529 Plan Managed By T Rowe Price

A 529 plan can help you reach your college savings goals while offering tax savings options.

Your investment can be used tax-free to cover tuition, room and board, books, supplies, computer technology, and equipment related to attending a qualified higher education institution as well as tuition expenses at K-12 public, private, and religious schools.+ Savings can also be used for education loan repayment up to $10,000 lifetime maximum per beneficiary.

  • Tax-deferred growth
  • Any withdrawals used to pay qualified higher education expenses are free of federal income tax and may be state tax-free as well.
  • Some states offer additional tax benefits including a state income tax deduction for your contribution.

College savings plans have a low impact on financial aid.

When it comes time to apply for financial aid, only a small percentage of the account’s value is factored in when determining your expected family contribution. Typically, 529 plans can be used in conjunction with other federal education incentives, such as Education Savings Accounts , the Hope Scholarship, and Lifetime Learning Credits.

Every family has unique college savings goals.

Thats why T. Rowe Price offers different investment approaches within each one of our college savings plans. Click on a plan below to review each individual plan’s investment options, so you can choose whats best for your college savings goals.

The account holder retains control of the assets.

Understanding 529 College Savings Plans

How do college savings plans compare?

Here are some common questions about 529 college savings plans:

A non-qualified withdrawal subjects earnings to a 10% federal penalty and applicable federal, state and local income tax. Your assets in a 529 plan account can grow in perpetuity there are generally no time or age limits on your use or distribution of plan assets.2

  • Is a 529 plan only for kids?

    Anyone of any age can use a 529 plan to save for education. In fact, you can be your own account beneficiary. If your chosen school is eligible, you can use 529 assets to pay for education expenses even if youre not attending full-time.

  • Can you use 529 plan assets for expenses other than tuition?

    529 savings can be used to pay for many college expenses, including:

  • Tuition
  • Applicable room and board costs
  • Any supplies required by the school
  • Student loans repayments*
  • Apprenticeship programs**
  • Does investing in a 529 plan lower my childs chance of qualifying for financial aid?

    A 529 plan has a relatively small impact on federal financial aid eligibility because 529 plan assets are considered assets of the account owner, rather than the beneficiary. When the parent is the account owner, 529 plan assets are factored into the expected family contribution rate, the same as any other parental asset. Learn more in BlackRock’s Understanding College Aid brochure or consult with a financial professional.

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    What Expenses Can A 529 Education Savings Account Cover

    These plans provide flexibility in how you can use the funds youâve accumulated to help handle education costs â but there are restrictions

    529 ACCOUNTS HAVE LONG BEEN A POPULAR WAY to set aside funds for education. They allow you to stash away money regularly while your son, daughter or other beneficiary is young, and when theyâre ready, the assets can be withdrawn tax-free â as long as you use them to pay for âqualified higher education expenses1

    âTuition and fees are the biggest educational bills youâll probably face, but there are other eligible expenses,â says Richard J. Polimeni, head of Education Savings Programs for Bank of America. Certain room and board, books, supplies and equipment required for enrollment or attendance at an eligible educational institution, as well as computers and peripheral equipment, computer software, internet access and related services that are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school are among the expenses that qualify. If your beneficiary is a special-needs student, certain other expenses may also qualify. The Internal Revenue Code spells it all out.

    âTuition and fees are the biggest educational bills you’ll probably face, but there are other eligible expenses.â

    Does It Matter What State The Student’s School Is In

    With the exception of K-12 saving discussed below, though you will be investing in a 529 plan sponsored by the State of Iowa, the student can attend any eligible higher-education institution in the United States or abroad.

    Iowa taxpayers can use College Savings Iowa assets to pay for up to $10,000 in K12 tuition annually with no Iowa state tax consequences as long as the Beneficiary attends an elementary or secondary school in the state of Iowa that is accredited under Iowa Code Section 256.11 and adheres to the provisions of the federal Civil Rights Act of 1964 and Iowa Code Chapter 216, or an elementary or secondary school located outside the state of Iowa that educates a Beneficiary who meets the definition of children requiring special education in Iowa Code Section 265B.2, if the elementary or secondary school is accredited under the laws of the state in which it is located and adhere to the Federal Civil Rights Act of 1964 and applicable state law analogous to Iowa Code Chapter 216.

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    Choosing A 529 Savings Plan Over Other Types Of Savings Vehicles

    Investing in a 529 offers several advantages over other types of accounts, like taxable brokerage or even high-yield savings accounts. For one, you get several tax advantages, which can help you save on both the cost of education and your income taxes.

    A 529 plan, even with its contribution limits, can help save parents a lot of money, says Andrew Wang, a financial advisor and managing partner at Runnymede Capital Management.

    “You can think of a 529 account like a Roth IRA account, except it’s for education purposes instead of retirement” he says. “You can save money by not paying taxes on your earnings and when you withdraw it for qualified education expenses like tuition and textbooks.”

    In addition, parents and guardians have the potential of earning more compared to sticking their money in a savings account. While growth isn’t guaranteed, many 529 plans show an average rate of return that’s higher than what you’d find with deposit accounts.

    Another option is opening a brokerage account, which may offer similar growth rates depending on your investment portfolio. Parents may like the fact that these types of accounts don’t necessarily have contribution limits, says Wang, compared to 529 plans, where individuals can contribute up to $15,000 annually before the gift tax exclusion phases out.

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