Due to shelter-in-place orders related to the COVID-19 pandemic, many parents unexpectedly found themselves homeschooling children for much of the spring semester. If that didn’t generate a new level of appreciation for educators, I don’t know what will. And while we don’t know yet whether you’ll be teaching geometry in the fall or joyfully sending your kids back to physical schools, May is the perfect time of year to review the cost of education and plans to fund it.
A 529 savings plan is a tax-advantaged investment vehicle to help save for education expenses. These savings plans grow tax-free at both the federal and state levels until a child needs to use the funds to help cover the cost of education. We’ve highlighted the basics of a 529 plan to help decide if it’s right for your little learner.
Funds can be used for both post-secondary and K-12 education expenses. A major benefit of The Tax Cuts and Jobs Act is that you can use 529 funds for private school tuition at accredited elementary, middle, and high schools – not simply higher education costs. The IRS will allow up to $10,000 per year per beneficiary to pay for tuition expenses at private and public K-12 schools.
You can use it for more than just private schools and universities. 529 plans are flexible and can be used for a number of different educational opportunities.
- Other educational institutions, including junior colleges, professional credentialing and certification programs, vocational and technical schools, can receive 529 funds as well as long as the institution is accredited by a recognized third party.
- If your child earns a scholarship, funds from 529 plans can be used for education expenses other than tuition without triggering taxes or a penalty. You can withdraw up to the amount of the scholarship without having to pay the 10% penalty, but you will have to pay taxes on the earnings.
- A great new benefit is that 529 plans can now be used to repay student loans – up to $10,000 per beneficiary.
- 529 savings plans can be transferred to immediate family members including spouses and other children.
Some plans allow you to make direct payments. It’s important to understand the limitations of the 529 plan once it’s time to start withdrawing funds. The majority of plans will allow payments to be made directly to the beneficiary or school. Some plans will even allow direct payments to a third party like a landlord or bookstore.
You can remove the funds without using them for education but will incur penalties. If all immediate family members have completed their education needs, you can access the remaining funds from the 529 plan. However, removing funds will incur a tax on any accumulated gains, a 10% penalty and an additional 2.5% penalty in the state of California.
Helping a child or grandchild pay for college typically is a top priority for families, but it’s often under-planned for. Education planning is one of eight core wealth management issues we review with clients to create strategies that help achieve goals for the future. But don’t procrastinate. Having time on your side is key to making a big impact.