While you may know that 529 College Savings Plans offer tax-deferred savings and tax-free withdrawals, there are several aspects of 529s you likely don’t know about. The benefits of college savings programs extend well beyond tax savings, but there are also important caveats to consider. Below are 5 things you may not know about 529 plans.
They aren’t just for traditional college programs. Registered apprenticeship programs, international schools, and some gap year programs (including study abroad, wilderness survival, art programs, etc.) can also be paid for using funds from a 529 plan. Additionally, 529 withdrawals can be used for up to $10,000 of tuition expenses at private K–12 schools, but expenses such as computers, supplies, travel, and other costs are not qualified in this case.
Qualified expenses may not be what you think. Besides the obvious tuition and room and board expenses, computers, internet service, and required course fees can be considered qualified expenses. However, fees for electives such as sports, parking passes, or entertainment costs (such as cable or streaming services) are not covered. Additionally, for those that graduate with some money leftover in their 529 account, it can be used for up to $10,000 in certain student loan repayments.
You may be able to get your money back if you don’t use it for college. Normally a non-qualified withdrawal is subject to a 10% penalty tax plus a tax on earnings. However, there are some cases in which the 10% penalty can be avoided, such as if the beneficiary attends a US military academy or receives assistance through a qualifying employer-assisted college savings plan. Additionally, if the beneficiary receives a scholarship or grant, you can withdraw an amount equal to the grant penalty-free in the year it is awarded.
They can be effective for estate planning. 529 contributions are considered gifts to the beneficiary and can be funded up to $75,000 per beneficiary per year without facing a gift tax penalty. In most cases, the gift tax comes into play for amounts over $15,000 in a single year, so this effectively gives you five years’ worth of gift tax exemption upfront. For those with high RMDs, 529s offer high contribution limits across multiple beneficiaries while retaining control of the assets during the account owner’s life, and upon death, assets pass without probate and estate tax.
They aren’t limited to just college-age beneficiaries. Students over 14 can use 529 funds for college credit classes, and there is no upper age limit on beneficiaries.
As you can see, 529s offer benefits and a few considerations you may not have known about.