Student loan debt just passed the $1.6 trillion mark earlier this year, and education costs are expected to continue to increase much more quickly than general inflation and wage growth.
Of the tools available to help families save for education expenses, the 529 plan is one of the best.
What is a 529 plan?
Formally known as a qualified tuition program (QTP), a 529 savings plan is a financial account designed to help save and grow assets in order to pay for “qualified” education expenses.
Which costs are considered “qualified” higher education expenses?
- Tuition and related fees
- Books, supplies, and equipment necessary for class
- Computers and peripheral equipment (e.g., monitor, keyboard, mouse), educational software, and internet access
- Eligible room and board expenses
What are the primary benefits of the plan?
- Plan assets may be allocated to mutual funds and ETFs.
- The investment earnings within the plan are tax-deferred and tax-free when used to pay for “qualified” education-related expenses.
- The owner maintains control over the assets and can change the beneficiary.
- The plan gives the owner the ability to remove assets from his/her taxable estate as contributions to the plan are considered a completed gift.
- Some states provide a tax credit or deduction for contributing to a state-sponsored 529 plan. You may be required to use the state-sponsored 529 plan to qualify for these tax incentives
- Investment gains within a 529 plan and plan distributions are not subject to the 3.8% Net Investment Income Tax (NIIT).
Can 529 plan assets affect Federal Student Aid eligibility?
Yes. Both the 529 plan’s account balance and the distributions can affect the student’s ability to obtain federal student aid. The extent of the affect depends on the owner’s relation to the student and the student’s dependency status. There are many moving parts to 529 plans and financial aid planning, so please call us with your questions.
Can I use 529 plan assets for K-12 education expenses?
Prior to the 2017 Tax Cut and Job Act, the IRS’ definition of qualified education expenses included only those expenses related to postsecondary school (i.e., college), and excluded those for elementary or secondary school (K-12).
Under current federal law, 529 plan assets may be used, without tax or penalty, for certain pre-college (K-12) expenses—up to $10K per student per year.
However, many states have not yet conformed to the federal law, so please review your state’s laws before using 529 plan assets for K-12 expenses.
Under the current law, student debt is not considered a “qualified” education expense, so any investment gains used to pay student debt will be subject to taxes and penalties, but help may be on the way!
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, if passed, may increase the utility of the 529 plan by allowing families to take tax-free 529 plan distributions for student loan repayment, homeschool expenses, and apprenticeship programs.
Please call us with any questions regarding 529 plans or if you’d like an objective review of your existing plan.
All the best,