529 Plans For College And More
Parental pride is a feeling that comes from knowing that you provided for your children in a way that helped them to succeed. When children graduate high school, they want to own that experience as if it belongs to them alone. But parents who read bedtime stories, helped with homework, attended school performances, made brown bag lunches, and shuttled kids to or from school can secretly own a feeling of accomplishment that your kids won't understand until they are parents themselves.
One of the biggest challenges of parenthood leading up to that graduation day is figuring out how to save for college. A 529 plan is one tax-advantaged savings vehicle to help parents and others save for a child’s future education costs. This post tackles some of the most frequently asked questions about 529 plans.
What is a 529 Plan?
A 529 plan is a qualified tuition program to save and invest for future K-12 or college education expenses. A parent, grandparent, other relatives, or friends can set one up for a child, or you can establish a 529 plan for your own benefit if you plan to attend college in the future.
The term “qualified” means that earnings grow tax-free, and distributions used for tuition and fees, room and board, laptops, or books for a college student are not taxable. Also, up to $10,000 in tuition payments per year towards K-12 education qualifies as a tax-free distribution.
What if my child wants to go to trade school?
The Internal Revenue Service (IRS) defines eligible institutions as "any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the Department of Education." Use the Federal School Code Search to find out if your institution is eligible.
Also, your child might consider in an apprenticeship. Under the National Apprenticeship Act, books, supplies and equipment used for apprenticeship programs registered and certified with the Secretary of Labor qualify for tax-free distributions. To see a list of apprenticeship programs, check out the career seekers page on Apprenticeship.gov.
What if my child receives a scholarship?
Research on how Americans pay for college shows that 25% of college costs are covered by scholarships. If a student receives a scholarship, you may withdraw up to the scholarship amount without incurring a tax penalty. You would, however, owe income tax on the earnings portion.
What if I save too much and there is “leftover” money in a 529?
529 plans have no expiration date, so if money is left over in accounts after children graduate college, the account owner has several options.
- Leave it: Keep the money where it is. If the beneficiary decides to go to graduate school, he or she can use the 529 funds for continued education.
- Transfer it: Give the remaining funds to another “qualified” beneficiary without tax penalties. The IRS considers the original beneficiary’s family, including siblings, step-siblings, parents, in-laws, and first cousins, as qualified beneficiaries.
- Take it: Move the money into another account. However, if you withdraw money for non-qualified educational purposes, you will face a tax penalty. A non-qualified 529 plan distribution is subject to income tax and a 10% penalty.
If you want help setting up a college savings plan for your child or grandchild, schedule a FIT meeting with one of our financial advisors in Bloomington or Indianapolis, Indiana. College planning is just one of the many services included in our proprietary financial planning process we offer to our clients. We continuously monitor your accounts to make sure you are on track to reaching your goals. To ensure that your education savings plan aligns with your financial plan, schedule a free consultation today.