A 529 plan is a tax-advantaged savings account designed to encourage saving for future education costs. They’ve been steadily growing in popularity over the 20+ years since they were created by the Internal Revenue Code.
Most people know the basics, such as funds can be used for college and can also be tax-free upon withdrawal. Some people may even know they can get a tax deduction for their contributions, which depends on the state they live in.
But here are 5 things that are lesser known that are also very important to consider:
529 Plans can fund more than traditional 4-year colleges.
Of course, a student can attend Penn State (WE ARE!), or various other community or online colleges. But did you know that trade schools are also in play – places like cosmetology or culinary schools? Funds can also be used for graduate or medical school, as well as over 400 international schools.
More recently, the Tax Cuts and Jobs Act of 2017 allows funds to go towards elementary and secondary school tuition as well! Granted, 529 funds don’t have many years to grow if you are using them for kindergarten – but the option still exists.
If that weren’t enough, the 2019 Secure Act makes it now possible to pay for apprenticeship programs as well as cover up to $10,000 in outstanding student debt. So uses for the funds continue to broaden.
Technology, internet access, and on-campus housing can be qualified expenses.
Fortunately, 529 withdrawals can cover “the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access,” according to the IRS. Such equipment includes printers, but not equipment that is intended mainly for entertainment purposes. Computer software used for educational purposes is also covered.
When it comes to housing, on-campus living expenses can be covered (off-campus…no). Knowing this can help decide if a student would be better off living in a dorm.
Accounts can be super-funded.
Individuals can give up to $15,000 typically ($30k for married couples) to another individual and be free of the gift-tax consequences. But a special provision says you can super-fund a 529 plan for five years upfront. In other words, you can invest up to $75,000 in one shot ($150k for married couples) and take advantage of five years of accelerations.
This could particularly come in handy if you have a generous grandparent (or rich Uncle, etc.) who would like to help contribute towards a child’s education. They can super-fund the account and it would get treated as if it came in over a five-year period.
You can always change beneficiaries.
Is it looking like little Johnnie might go straight into the workforce and not need funds for school? Or perhaps there are funds left after the kid goes to school. No worries here – the owner of the account can change beneficiaries at any time. I have seen this come in handy when an older sibling has leftover funds that could benefit the younger sibling, for example.
The beneficiary can be changed to a member of the immediate or extended family, which would include siblings, grandchildren, nieces/nephews, and cousins. Heck, you can even change it to yourself! I have seen many a senior go back to the classroom rather than spend time on the golf course.
529s are convenient and flexible.
I love things that are convenient, and 529 plans can be set up on autopilot very easily. Parents can set up automatic contributions to go into the account, and have it auto-invested. A link or code can be given to relatives to make contributions directly to it, in lieu of birthday presents.
In addition, the investment choices are diverse and of a wide variety. The investments can even be age-based so that they change on their own as the student gets closer to needing the funds.
529s are flexible in that they do not have any income restrictions, and contributions can be made as little as $25. Most plans allow contributions as much as $400,000-500,000, if you want to make sure your child has enough to cover Stanford undergrad and/or Yale Law School.
I hope you found these lesser-known secrets of value. 529 plans serve a variety of purposes and could benefit you more than you know. If you want to know how they could specifically benefit you, feel free to ask.
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