FAQs For 529 AccountsSubmitted by Castlebar Asset Management on June 3rd, 2015
As we work with our clients through the financial planning process they ask great questions. Frequently, the one account that clients ask the most questions on is 529 accounts. The fact that there are no clear standard rules, like IRAs or maybe because these accounts have only been around for 15 years, leads to many questions. I have gathered some of the most frequently asked questions about 529 accounts and posted my responses below.
What if my child does not want to go to college?
If post-secondary education is not in the cards then there are few options. You are the account owner and can change the beneficiary to a family member (another child, a sibling, first cousin, grandparent, aunt, uncle or yourself). The money in the account can be used on education expenses for the new beneficiary. Most plans allow you to change your beneficiary only once a year. If your child has a change of heart and decides to attend college you can always change the beneficiary back to them.
You don’t have to use 529 accounts on 4 year universities or colleges. 529 funds can be used for two year associates degrees, trade and vocational schools.
A final option is to withdraw or cash out the plan. You will pay income tax and a 10% penalty on the earnings. There is no tax or penalty on the contributions that you have made.
If you are unsure if your child is going to head off to college or not, my advice is to always sit tight. Things can always change!
What if they get a full scholarship?
You will not lose money if your child receive a full academic or athletic college. You can withdraw money from the 529 penalty free, but you will have to pay taxes on the earnings at the scholarship recipient’s tax rate. You can also use your 529 account to pay for expenses not covered by the scholarship; such as room and board, books and other required supplies.
You can keep this account open and have your child named as a beneficiary if they plan on pursuing a graduate degree. You can also change the beneficiary (see above)
How much can I contribute?
The answer is not as straight forward as an IRA or 401(k). The maximum contribution is $350,000 per beneficiary. It is important to remember federal gifting tax laws. A gift of more than $14,000 to a single person in one year is subject to federal gift tax. 529 plans allow an individual to potentially contribute up to $70,000 (and married couples up to a total of $140,000) to an account for a particular beneficiary in one year without triggering the tax.
To do this the person contributing must elect to treat the entire gift as a series of five equal annual gifts. The five-year prorating is elected by filing a gift tax return for the year in which the gift is made. If the donor passes before the start of the fifth year, a portion of the contribution must be added back to their estate for tax purposes. Consult with a tax advisor regarding the gift and estate tax rules for more specific information.
What can I use 529 money on?
You can use 529 funds to pay for qualified expenses. Qualified expenses include: tuition, required fees, books, supplies, computer-related expenses and room and board for someone who is at least a half-time student. Pizza, burritos and beer don’t qualify, unfortunately.
What if a family member wants to contribute?
Family members can opt to either open their own 529 account where they are the owner and name your child as the beneficiary or contribute to an already opened 529 plan where they are not the owner. If they contribute to a 529 account which they are the owner, your family member will receive the state tax benefit (if there is one, there is in Kansas). It can be easier to open just one account for the beneficiary and have grandparents and family make contributions to keep everything simple.
Are there any age or income restrictions to contribute to a 529 plan?
No – anyone can contribute to a 529 plan.
Why use a 529 over a regular taxable account?
529 accounts are tax deferred accounts. Therefore your contributions will grow tax free as long as you use the funds on college expenses. This is superior to paying taxes on an after tax account. An after tax account will offer complete flexibility on where you can spend it versus a 529.
Andrew Comstock, CFA
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.