Various Ways to Effectively Use a 529 Savings Plan

What is considered a qualified educational expense? When that question pertains to 529 savings plans, the answer may be considerably more significant than you might expect.

Although 529 accounts are mainly used to pay for children's college tuition, those funds can also be used for various qualified expenses. For example, recent changes to federal law under the Tax Cuts and Jobs Act of 2017 have given investors additional options for spending their 529 plan dollars.

529 plans earnings are not taxed under the federal tax code; withdrawals for eligible expenses are tax-free. Most states also permit 529 savings plan contributions to be deducted from state income taxes. Still, since the plans are state-sponsored, they differ depending on the state concerning investment options and other features. For example, suppose withdrawals are used for purposes other than qualified education expenses. In that case, the earnings will be subject to a 10% federal tax penalty and federal and, if applicable, state income tax. However, states take various approaches to the income tax treatment of withdrawals. For instance, withdrawals for K-12 expenses may not be exempt from state taxes, depending on the state.

Here are seven ways to utilize a 529 plan:

1. 529 plan contributions are tax-advantaged gifts.

Relatives and friends can use 529 savings plans to give gifts to the children in their lives. For example, grandparents, aunts, uncles, or anyone wishing to help fund a child's education may contribute to an existing 529 savings account or open a new account and name the child as the beneficiary. Those 529 contributions can be deducted from state income taxes in many states. However, gift-givers should remember that gift taxes may apply to contributions exceeding the annual exclusion of $15,000 per recipient for 2018.

529 gifts come with a special tax exemption: Individuals can contribute up to $15,000 and $30,000 for married couples yearly without gift-tax repercussions. Using a special election, you can invest up to $75,000 and $150,000 for married couples at one time by pulling forward five years' worth of contributions. This might be an advisable option for those individuals intent on reducing future estate taxes or anyone contributing to a student who could use the funds immediately.

2. Pay for elementary and secondary school tuition using a 529 plan.

Parents can use up to $10,000 contributed in 529 accounts to pay tuition for children attending kindergarten through 12th grade due to 2018 tax reforms.

The tax-free earnings on withdrawals used for K-12 tuition expenses may not be very high due to the short period of growth in those accounts. However, the state tax deduction benefits may be worthwhile. Immediate state-level tax benefits will undoubtedly draw more people paying for private school tuition into 529 savings plan accounts. Any family paying for private school tuition in a state offering 529 tax benefits would benefit.

However, investors and advisors should do their homework before assuming that state-level tax benefits are qualified in their state. In addition, qualified education expenses include tuition for an elementary or secondary private or religious school up to a maximum of $10,000 received per beneficiary during the taxable year.

3. Create a 529 savings plan for yourself to prepare for a career change.

529 plans are not just for teens and kids. Instead, adults can set up 529 savings plans to cover their own qualified educational expenses, which may prove especially useful to those seeking a change of careers.

There are a few ways adults can take advantage of 529 savings plans. The most straightforward way is to open new accounts and designate themselves as the beneficiaries. Parents can also "take over" existing 529 savings plans that once set their children as beneficiaries. For example, suppose a child wins a scholarship, and her college expenses prove lower than initially anticipated. In that case, a new beneficiary in her family, including her parent, can be designated as a beneficiary for the account and use the balance of funds without facing a tax penalty.

4. Pay for vocational school, community college, online courses, and graduate programs using a 529 plan.

Though many associate 529 savings plans with four-year colleges, they can be used to fund tuition and other educational expenses at post-secondary institutions and programs, including community colleges, trade and vocational schools, graduate schools, specific apprenticeship programs, and qualifying online courses degree programs. To ascertain whether a school or program is eligible for 529 savings plan spending, check with the school's admissions office or search the U.S. Department of Education's accreditation database regarding their status. For distributions received after December 31, 2018, qualified education incorporates expenses for supplies, fees, books, and equipment requested for the participation of a designated beneficiary in specific apprenticeship programs.

5. Technology and internet access can be considered qualified expenses for a 529 savings plan.

529 savings plans withdrawals can cover "the cost of purchasing any computer technology, related equipment and related services such as Internet access," stated the IRS. Such equipment includes printers, but not the equipment intended predominately for entertainment purposes. Computer software utilized for educational purposes is also covered.

6. A 529 savings plan can help you save throughout retirement.

IRAs and 401(k)s are the most popular vehicles for retirement savings, but 529 savings plans can play a significant role too for a subset of retirees who would rather spend their golden years learning in a classroom than on the golf course. In addition, 529 funds can be used to pay for college courses or continuing education classes at qualifying institutions. Once again, searching the Department of Education's database or verifying with an institution's admissions office can help current and future retirees ascertain where they can spend their 529 saving plan funds.

7. Pay for disability expenses by Rolling 529 savings into an ABLE account.

Achieving a Better Life Experience (ABLE) accounts originated in 2014 to allow individuals with disabilities and their families to save up money for disability-related expenses. Earnings accumulated in ABLE accounts grow on a tax-deferred basis. They can be withdrawn tax-free for certain eligible expenses such as housing, assistive technology, and transportation. Similar to traditional 529 accounts, ABLE accounts can also cover education expenses. Also, tax-advantaged treatment applies to savings used for qualified disability expenses. State tax treatment varies. Suppose withdrawals are used for purposes other than qualified disability expenses. In that case, the earnings will be subject to a 10% federal tax penalty and federal and, if applicable, state income tax.

Nevertheless, sometimes, parents who have started traditional 529 accounts for their children realize only later, after a child's disability diagnosis, that they would benefit from an ABLE account. Fortunately, the Tax Cut and Jobs Act offer them some relief: 529 savings plan account holders can roll their assets into ABLE accounts — up to the annual contribution limit of $15,000 — until January 1, 2026. In addition, a 529 savings plan account can be rolled into an ABLE account for the same beneficiary or a different beneficiary within the same family. For instance, a family may roll money from a 529 savings plans account benefiting one sibling into an ABLE account benefiting another sibling.

Today, more than ever, 529 savings plans can help investors and their children achieve a range of educational and career goals. With the proper planning and advice, Americans can save their money while enriching their minds.

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