With the ever increasing costs for college and post-high school education, parents and grandparents often contribute to Section 529 Plans.
529 college savings plans are often thought to be the most effective way to save for college education expenses. Contributions to these plans can be deducted from state income tax, grow federal and state tax-free, and can even be withdrawn tax-free for the use of higher education expenses, such as tuition, room and board, books and other similar costs. With the increasing amount of 529 plans, some are finding that a portion of the plan balance may not be needed, in fact, for college expenses.
Due to the variability in college expenses, planning for the precise amount can be difficult. There are so many factors that affect college expenses. In-state versus out-of-state tuition costs vary, as do public versus private institution costs. Future tuition inflation levels and scholarships also can greatly affect a student’s college expenses. Unlike some other child savings avenues, 529 plans give account owners control. 529 plans also provide ways to divert and divest the surplus or unused amount in the plan. Some options account owners have are:
- Change the beneficiary of the 529 plan to a different family member in order to cover their future college expenses. Account owners have the ability to name a beneficiary without tax repercussions. A qualifying family member could be a sibling, parent, cousin, niece, nephew, aunt, uncle, grandparent, or spouse of the beneficiary.
- Leave the money alone and let it grow tax-free. This route may be especially useful for beneficiaries who plan to go to college (or back to college) later. Some use this approach with the intentions of naming a yet-to-be-born family member as the beneficiary in the future. Manning & Napier suggests spending taxable dollars first in order to let retirement accounts grow for as long as possible considering the tax advantages. This also proves to be true for college funds. One could see significant growth between now and when a future grandchild attends college if they allow the balance to grow within this 529 plan tax-free.
- Use the money to pay for trade or vocational school or a career-training program. Traditional college is not for everyone, and while 529 plans are marketed as college savings plans, the funds can be used for a variety of qualifying post-secondary training and educational programs.
- Take a non-qualified distribution from the account. If none of the potential options above appeal to you, you can liquidate all or some of the built-up funds within a 529 plan. Initial contributions are returned tax and penalty free. You may consider penalties if you go this route, as gains accrued within the account can be subject to income taxes and a penalty.
Source: Manning & Napier. Andrew DelMedico. Four Things You Can Do with Excess 529 Plan Funds. August 25 2017.
There are many benefits to 529 plans and many ways to use these plans even if the student doesn’t require the entire amount within the account.
We’d love to have the opportunity to talk about these concepts with you!
Barbara A. Culver
CFP®, ChFC®, CLU, AEP®