May 15th, 2020

Welcome to Pt. 4 of the Pre-Tax Accounts Series! On to 529 Plans!

There are many rules and regulations when it comes to 529 Plans and they vary from state to state. This article will be a high-level overview of 529 Plans. Always consult your individual plan for specific benefits and regulations.

What is a 529 Plan?

A 529 plan is a tax-advantaged education savings plan that allows you to save money for qualified education expenses. The money in your 529 Plan is able to grow TAX FREE and there are NO TAXES when you withdraw the funds for eligible educational expenses!

State Sponsored Plan

529 Plans are sponsored on a state level, so rules and regulations vary, state to state. You are not confined to contributing to your state’s 529 Plan. You can shop around for the best 529 plan that meets your needs with any state that offers 529 plans and you can use 529 Plan funds to pay for college expenses in another state! You may also be eligible for a state income tax deduction or credit for 529 Plan contributions, depending on where you live. More on this later in the article.

What are Qualified 529 Plan Expenses?

Below are some of the qualified expenses for a 529 Plan:

• College tuition and fees

• Vocational and trade school tuition and fees

• Elementary, Secondary, Private or Religious School Tuition- up to $10,000/year

• College room & board fees

• Off-campus housing and rentals- qualified up to the cost of room and board on campus.

• Food & Meal Plans

• Off-campus food- qualified up to the cost of food and meal plan on campus.

• Books & Supplies- paper, pens, books, etc…

• Computers- must be required as part of the students attendance

• Computer software- must be required in order to complete school work

• Internet service

• Special needs equipment

Transportation, extra-curricular activities, college application and testing fees, health insurance and more, are not qualified 529 Plan expenses. Consult your individual plan for specific benefits and regulations.

Who can be your beneficiary for a 529 Plan?

When you start a 529 Plan, you designate a beneficiary. This beneficiary can be yourself, your children, siblings, grandchildren, nieces, nephews, cousins and more. Now, if you skip generations, that’s where it gets tricky and you may incur some penalties. Consult a professional and your specific plan for more information on this.

529 Plan Income Restrictions and Tax Benefits

Income restrictions, there are none😊, point, blank, period! Some states do have laws on minimum and maximum account balances though.

Also, some states offer state-level tax deductions or credits that can be claimed on your state tax return. It is important to know this information before choosing a 529 Plan. You want to know ALL the benefits! This may be a deciding factor for which plan you choose.

When can you start saving with a 529 Plan?

The answer is yesterday. You can contribute funds to a 529 Plan whenever you want. Let’s say you don’t have any children and you plan to in the future. You can get a 529 Plan in your name and when you have children, add their name to the plan. Therefore, you can use the 529 Plan funds for you and/or your children! Click here to review 529 Plan options.

529 Plan Impact on Financial Aid

Colleges consider 529 Plan funds to determine how much financial aid a student receives. Generally, this will result in receiving less financial aid for having money in a 529 Plan. Alternatively, the more funds you have in your 529 Plan, the less debt the student has to occur.

Using 529 Plan Funds for Non-qualified Expenses

If you use 529 Plan funds for non-qualified expenses, you will occur federal and maybe state taxes, as well as a 10% penalty. This is to encourage people to use 529 Plan funds for approved educational expenses only!

SSS Final Thoughts on 529 Plans

• I am just starting to shop around for 529 Plans. I initially thought of investing in a 529 Plan when I was pregnant and decided not to because I wanted to put all the money I could into my HSA, to cover medical expenses for the birth of my daughter, which I did! No out-of-pocket expenses were paid for the birth of my daughter!

• I am highly considering asking friends and family to contribute to my daughters 529 Plan. In my newsletter that the Exclusive OYC Club Members receive, I talk about how I saved and continue to save money on expenses for my daughter by leveraging my community. JOIN THE OYC CLUB HERE!

• My partner and I plan on our children either receiving scholarships, if they choose to go to college, or us funding their education ourselves. Our goal is to not have our child and future children take out any student loans. So a 529 Plan fits into our goals for their education.

• I like how I am able to change the name of my beneficiary. Let’s say I don’t use the 529 Plan funds for my daughter. I can use the funds for my future children, my younger brother or other qualified family members.

Final thoughts… A 529 Plan seems like a beneficial investment for me and my family, especially having no income limits. 529 Plans are a way to build generational wealth also, which is one of my life goals and one of my why’s. All in all, I will be investing in a 529 plan in the near future.

Do you have a 529 Plan? If so, why and how do you plan on using it? Was this information helpful? Did you learn anything new? Let me know in the comments below or on Instagram or Facebook!

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