5 Uses for Your 529 Plan Besides College Tuition
Whether you’re a parent or a grandparent, a 529 savings plan can be a great strategy to help fund your young student’s college tuition. But one question our Sacramento-area financial planning firm often gets is “What if I save too much in the 529 plan?”
Maybe the college tuition turned out to be less expensive than you planned, or maybe your child or grandchild had plans for life other than a university. Whatever the cause for concern, take heart: You can do more with your 529 plan than pay for tuition. This article looks at five other things these accounts can pay for besides college. But first …
What Is a 529 Plan?
The 529 plan got its start in the 1990s when Michigan acted to address the increasing costs of college. Ultimately, this initiative morphed into the existing state-sponsored savings and investment accounts meant to encourage education savings.
The federal government treats these accounts as tax-advantaged, meaning you make contributions with after-tax dollars, the contributions grow tax-free, and any qualifying withdrawals are also tax-free.
Some states offer tax deductions and other benefits, so it’s worth doing your homework to incorporate a 529 plan account into your long-term financial planning.
If you’re the account owner, you can name a beneficiary, such as a child, grandchild, niece, nephew, and so on. That beneficiary gets to enjoy the benefits of those qualifying distributions, which, as we said, encompass far more than just tuition.
1. Think Beyond Tuition
Say your kid is headed for an Ivy League school. You’ve been saving diligently all these years to help fund their education and thus reduce their debt burden once they graduate. You have options for your 529 plan other than tuition, including:
Fees
Books
Room and board at eligible education institutions
Computer technology, equipment, and services
Note that the list encompasses federal tax-free withdrawals. You will want to check with your state’s rules as well. Many, like California, don’t always conform with the federal government (more on California below). Making a non-qualified withdrawal could mean state taxes, penalties, and even claw-backs of tax deductions and other tax benefits.
2. Expand Your Definition of Education
The federal government has made several changes to 529 plans over the past several years, including broadening the definition of higher education. With the passage of the SECURE Act in late 2019, you can now add qualified apprenticeship programs to a list that already includes:
Community colleges
Trade schools
Graduate programs
That means even as your child’s education plans evolve, you can still support them.
3. Start Funding Their Education in Kindergarten
The federal government recently added K-12 education costs to the list of qualifying expenses. You can now pay up to $10,000 per child per year, and eligible institutions include public, private, and religious schools.
This option can be an attractive financial planning strategy if your state offers a tax deduction for contributions.
4. Help Pay Off Your Student’s Debt
The SECURE Act not only opened the field to apprenticeships but also enabled families to pay down college loans.
You are allowed to pay up to $10,000 in student debt per beneficiary. Note: That’s a lifetime amount, not an annual one.
If you’re a grandparent, you might find this option especially attractive. Your distributions are considered untaxed income for your beneficiary, which could reduce the financial aid they receive by as much as half of the distribution.
However, the Free Application for Federal Student Aid (FAFSA) uses your student’s income from the prior two years. You may want to wait until your grandchild is in their sophomore year before withdrawing funds on their behalf. You can then follow up with a distribution to pay down their loan after they graduate.
5. Help Other Family Members
Though your state’s definition of beneficiary may differ, the federal government’s definition is pretty broad for a 529 account: “You can set one up and name anyone as a beneficiary—a relative, a friend, even yourself.”
So once your original beneficiary no longer needs help, you might consider changing the beneficiary to another family member who could use some assistance with the high cost of education. You might even make yourself the beneficiary and enjoy the gratification that comes with lifelong learning!
A Note for Californians
Our fiduciary wealth management firm in Roseville and Folsom, California, often advises clients on the specifics of 529 plan rules in our home state. California sponsors the ScholarShare 529 plan, which offers tax-free growth on investment earnings and tax-free withdrawals for qualified expenses.
You can contribute up to a generous $529,000 for your beneficiary. You also have a range of investment options to choose from, including T. Rowe Price and TIAA-CREF, and have lower-than-average fees.
However, California does not offer tax deductions for contributions as some states do. And it doesn’t always conform with the federal uses we shared here. From the ScholarShare website:
“Withdrawals for tuition expenses at a public, private or religious elementary, middle, or high school, registered apprenticeship programs, and student loans are subject to state income tax and an additional 2.5% California tax. You should talk to a qualified advisor about how tax provisions affect your circumstances.”
That last line is important. As a Californian taxpayer and 529 account holder, you should talk with your tax professional or financial advisor to make sure you understand the impact any distributions can have. A 529 plan is still an important tool in college savings—but you want to make informed decisions based on your specific situation.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.