You worked hard to invest in your child’s 529 Plan over the years and now that it’s time for them to go off to college, questions arise on how exactly the money can be used. Below are some common questions that come up:
Let’s start with the basics; what is a 529 Plan?
A 529 Plan is an education savings plan, designed to help set aside funds for eligible higher education expenses. There are 2 types; a College Savings Plan or a Prepaid Tuition Plan. With a College Savings Plan the money is invested in mutual funds; any earnings grow tax-free and distributions for qualified education expenses are tax-free. A Prepaid Tuition Plan allows you to prepay tuition at today’s rates, helping to manage future tuition costs. For the purpose of this blog, we’re going to focus on 529 College Savings Plans.
With a 529 College Savings Plan, what is considered an eligible expense?
- Tuition & fees
- Room and board (as long as the student is enrolled at least half-time)
- Books, supplies and equipment
- Computers and related equipment and software required for course work
What if my child decides not to go to college? Can a 529 College Savings Plan be used for other types of education?
The benefit of opening a 529 College Savings Plan for your child is that you control the money. If one of your children decides not to use it, the money can be transferred to another child, grandchild or family member. However, if they decide to go to a vocational school or other postsecondary institution, it may be recognized as an eligible institution and therefore be covered. Below is a site that you can use to see if a particular school would be covered by a 529 Plan:
What if my child receives a scholarship?
You can use the funds to pay for any eligible expenses not covered with the scholarship such as room and board, books and required supplies. You can also take out the money without incurring a 10% penalty, however any earnings are subject to income tax.
My child wants to live off campus; can I use money from the 529 College Savings Plan to pay their rent?
As long as your child is enrolled at least half-time in a program, room and board qualifies as an eligible expense. If they live off campus, you may use the funds to pay for their rent, up to the amount it would cost, had they lived on campus. The school’s financial-aid office will be able to provide you with that room and board allowance amount.
If my child lives off campus, can I use money from the 529 College Savings Plan to help pay for groceries?
Again, you will need to check what the allowance is. If your child lived on campus, what would the meal plan cost? This is usually broken out with the room and board cost.
What if they want to study abroad for a semester?
A large portion of the cost associated with studying abroad may be covered by your 529 Plan. Room and board, tuition and books are all covered. Remember though, you still have to be considered at least a half-time student. The flight over, any trips and foreign transaction fees would not be covered.
Are there any penalties if I withdrawal the money and don’t use it for education?
Any earnings in the account are subject to a 10% withdrawal penalty and are subject to income tax. Below are some exceptions on withdrawing and avoiding the 10% penalty, however in all the cases, the earnings portions of the withdrawal will still incur income tax:
- The beneficiary passes away
- The beneficiary becomes permanently disabled
- The beneficiary receives a scholarship, veteran’s education assistance, employer-paid educational assistance, or certain other payments toward their education.
529 Plans are a great vehicle to save for your child’s education and anyone can contribute to them. If you have any questions on how yours can be used or if you’d like help setting one up, please let me know.
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