The ABC’s of a 529 Plan

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What does 529 Pay For?

When you decide to have kids, your first thought is not how am I going to pay for college, but it might be your second. Raising my children in South Florida, I was familiar with the Prepaid Florida Tuition Plan which is one type of plan. I chose another, the 529 Savings Plans, or what is also known as a Qualified Tuition Plan (QTP), which was fairly new.

I wish I had not overlooked this type of tuition plan or had asked their grandparents to invest in a 529 Savings plan, as opposed to gifting them money for birthdays and holidays. Since 1996, 529 plans are a way of saving for college for your student. If you had such a qualified tuition plan or a relative set one up for you, then you and your student are now eligible to access the funds. Lucky you. The funds from your 529 plan can be used not only to pay for higher education (starting in 2018 for elementary or secondary school tuition up to $10,000) but for room and board as well.

The SECURE Act signed into law on December 20, 2019, expanded the benefits of 529 plan including adding student loan repayments and the costs of apprenticeship programs as qualified expenses for distributions made after December 31, 2018. If you received refunds from your students’ education institution, you should contact your plans administrator as failure to re-contribute the refunds may result in taxable income if not returned within 60 days of receiving the refund.

Tuition and Equipment

Tuition and fees, books, supplies, and equipment. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.

The purchase of a computer or peripheral equipment, computer software, or Internet access and related services if it’s to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (this doesn’t include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature).

Room and Board

There are special rules that apply to room and board. Expenses for room and board must be incurred by students who are enrolled at least half-time. The allowance for room and board, as determined by the school, is included in the cost of attendance (for federal financial aid purposes) during a particular academic period and for the living arrangement of the student. The actual amount is charged if the student is residing in housing owned or operated by the school.

You may need to contact the eligible educational institution for qualified room and board costs. A student who lives off-campus can include in the qualified higher education expenses reasonable room and board costs as determined by the QTP, up to the federal financial aid allowance (as per above). If your student is living at home, then your student should make actual room and board payments to their parents. Receipts should be well documented and you need to spend the money in the same calendar year as the withdrawal, not the school academic calendar year but the actual 12 month calendar year. In addition, you should check with your financial advisor as there should be coordination with college tax credits. If you pay for tuition and required books with the 529 plan funds, they will disqualify those expenses from the tax credit. Read our Tax Time blog.

Any change in the designated beneficiary of an interest in a QTP isn’t treated as a distribution if the new beneficiary is a member of the family of the old beneficiary. The change in beneficiary rule gives parents, or other donor’s, flexibility to use the funds for any family member who needs them most. For example, if a designated beneficiary decides not to attend college, or receives a full scholarship, another child can be named as long as the new child is a member of the family. Or if funds remain in the QTP after a child has finished school, a younger family member can be named to use the balance. For more information, you should contact the custodian of your 529 plan.

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2020-08-24T11:38:36-04:000 Comments

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