Started in 1996, 529 plans provide tax incentives for those saving for post-secondary education. The plan allows funds saved to be used at any eligible education institution, which typically includes colleges, universities, vocational schools or any post-secondary educational institute that is currently eligible to participate in U.S. Department of Education student aid programs. Operating much like at 401(k) or IRA, funds deposited into a 529 plan are not taxed, either by the federal government or the state in which the participant resides.
529 funds can be withdrawn for post-secondary education expenses such as tuition, fees, books, and room and board. Along with tuition and related costs, computer technology costs such as the purchase of a laptop computer, or Internet access can be paid for with withdrawals from the plan.
Though originally designed to be used as a college savings plan, the new tax laws going into effect in 2018 now allow funds from 529 plans to be used for elementary or secondary education tuition and expenses as well, with plan participants able to withdraw up to $10,000 annually. It’s important that those considering withdrawal of funds for this purpose check with the state where their plan is located to ensure that they are cooperating with the new federal rules, since withdrawing funds in a non-participating state can mean a hefty penalty.
There are no restrictions for setting up a 529 plan, so you can set one up and name yourself – or anyone, as the beneficiary. Beneficiaries can be changed at any time, and there are no tax consequences when withdrawing excess funds from a current plan as long as those funds are rolled over into another 529 plan. While there are no formal limits to what can be contributed to a 529 plan, plan participants should note that the gift tax exemption for 2018 is $15,000, so any contributions above that amount would have to be noted on Form 709 – United States Gift Tax Return.
There are currently two types of 529 plans available, a savings plan and a prepaid tuition plan, with states typically offering both types of plans. The savings plan is designed similar to a retirement plan, with funds invested as directed. The prepaid tuition plan allows you to pay tuition through installment payments, but typically does not include room and board. Currently, educational institutes can offer a prepaid 529 plan but not a 529 savings plan.
You are not restricted to investing in a plan offered by your own state, though state tax benefits may be limited to plans offered in your resident state. Most plans do not restrict school eligibility to the state where the plan originates, though it’s always best to check with the school to ensure that they are an eligible institution under 529 plan rules.
A great vehicle for saving for college tuition and related college expenses, and now even private elementary and secondary school tuition, be sure to check with your state to determine what plans are available and what would work best for you.