As the back-to-school season begins, it's a perfect time to discuss maximizing the benefits of a 529 college savings plan. SIA wants to ensure that you and/or your loved ones are fully leveraging this valuable educational savings tool. 529 plans have evolved beyond their original “college-only” scope. In many states these plans now encompass K-12 tuition for private and religious schools, as well as trade schools, graduate programs and select international institutions. This expanded flexibility can help alleviate the financial pressures associated with education at all levels. The following qualified expenses may be allowed: Educational Expenses: - Higher Education: Post-secondary institutions eligible for federal student aid
- Vocational or Trade Schools: Including specialized institutes such as culinary programs
- K-12 Education
Lifestyle and School Supplies: - Housing: On-campus accommodations or equivalent off-campus costs
- Books and supplies (as mandated by specific courses)
- Special needs equipment: When essential for the student's educational pursuits
Technology: - Computers: When primarily utilized for educational purposes
- Software: If required for coursework
- Internet: Under specific circumstances
Note that the timing of withdrawals from 529 accounts is important. To avoid potential tax implications & penalties, ensure that the funds are requested within the same calendar year as the incurred expenses. The account owner should check with their custodian to determine what other rules may apply.
There may be a scenario where one might have excess funds in a 529 plan. This could occur if the beneficiary receives a substantial scholarship or decides to forego post-secondary education. In such cases, several options are available:
Change Current Beneficiary: The account owner may opt to change the beneficiary on the account to another qualifying relative, in accordance with the transferability rules. Maintain Current Beneficiary: The account owner can choose to keep the current beneficiary, allowing for the possibility that they may reconsider attending college or pursue graduate studies in the future.
Repay Student Loan: If all intended beneficiaries have completed their education, the account owner may utilize up to $10,000 to repay federal or private student loans for the beneficiary or their siblings. Transfer to a Roth IRA: Beginning in January 2024, a new option became available. A transfer can be made up to a lifetime limit of $35,000 of unspent funds to a Roth IRA account for the benefit of the beneficiary, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income. There are many stipulations, so before rolling the $35,000 out of the 529 plan, it’s important to understand that there are limitations: - The 529 plan must have been established for at least 15 years before a rollover can be executed. Contributions made to the plan in the last five years before distributions start (including the associated earnings) are ineligible for a tax-free rollover. - The rollover can’t exceed the annual Roth income limit, which in 2024 is $7,000. So, to roll over the entire $35,000 limit, it would have to be done over six years under the current contribution limits. The beneficiary must have earned income of any amount rolled over each year.
Cheers to a successful school year!
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