Six ways to use a 529 Savings Plan

May 29th is National 529 savings plan Day. What better time is there to showcase 529 savings plans, their tax benefits, and their many uses? Guest blogger, Nichole Coyle, CFP® CSLP®, breaks down what to know about a 529 savings plan and it’s uses.

What is a 529 savings plan?

It’s a state-sponsored savings plan that allows you to save money for a beneficiary with certain tax benefits. Many states offer tax benefits on the contributions made to a 529 savings plan. Additionally, the account owner can withdraw funds, tax-free to cover a number of eligible expenses. The majority of these eligible expenses are education related. However, there is more to the 529 savings plan than just education savings.

Who can be a plan beneficiary?

You can save money for your child, another family member, a family friend, and even yourself. Often parents or grandparents open accounts and name the children/grandchildren as beneficiaries. When you set up a 529 savings plan, you can invite others to contribute to it as well. Often relatives want to do this for holidays and birthdays.

Did you know that 529 plans aren’t just for college expenses anymore?

Changes over the past few years have expanded the use of 529 savings plans. Now they include expenses outside of college tuition, as well as outside of education expenses altogether.

529 plans have traditionally been used to save and invest money for college-related expenses. These expenses may include tuition, room and board (including off-campus housing), books, computers, and other qualified expenses. Some state sponsored plans provide an incentive by allowing for a state tax deduction on contributions made that year. Additionally, if certain eligibility requirements are met, the distributions from a 529 Savings Plan can be tax-free (including the interest earned).

These plans can be a great tool to save for college. But, what happens if the beneficiary doesn’t go to college or earns scholarships?

Six alternate ways a 529 Savings Plan can be used:

1. 529 savings plan funds can also be used prior to college. For example, you can use funds from these plans for private K-12 tuition, homeschooling costs, tutoring, and even some apprenticeship programs.
2. The beneficiary can be changed to any other family member, including yourself! This also means your child can rename the beneficiary to their future children or grandchildren. This allows for a multi-generational investment.
3. If the beneficiary is attending college, but received grants and scholarships to cover expenses, the full cost of tuition/expenses can still be taken from the 529 savings plan without penalties each year.
4. As long as the 529 plan was established at least 15 years prior, up to $35,000 can be rolled over to a Roth IRA. This type of rollover is subject to certain rules. So, please seek out counsel from your financial planner and tax professional to learn more.
5. Up to $10,000 can be used from a 529 savings plan to pay off existing student loan debt. This applies to both the beneficiary and each of the beneficiary’s siblings.
6. The owner or beneficiary can also distribute funds that do not qualify for any of the above. However, they may be subject to a 10% penalty and any income tax due on the earnings. Any amount contributed (the principal) will be distributed without tax or penalty. Additionally, there are some exceptions to the 10% penalty such as the death or disability of the beneficiary.

Putting it All Together

Overall, the 529 savings plan has become an enticing investment vehicle for future education expenses. Because of the recent expansion of its uses and rollover potential, a 529 plan may be a good addition to your financial plan. As always, if you have questions about this or any other financial topic, don’t hesitate to contact me.

Nichole Coyle, CFP®, CSLP®

Managing Partner, Financial Planner

2300 St. Clair Ave NE, Cleveland, OH 44114

216.621.4644 x1607 office, 330.607.2213 cell

Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor. Cetera is not affiliated with the financial institution where investment services are offered or any other named entity. Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.

The views depicted in this material are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.

Posted In: Guest Blog