How To Use Additional 529 Plan Cash – Forbes Advisor

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A 529 college savings plan is an investment account that families can use to save tax-free for a child’s education costs. States run these plans, and while you don’t have to use the plans your home state offers, you may get additional tax breaks for them.

If your child receives generous scholarships or chooses not to go to college, you may find that you have actually been diligently saving too much on a 529 plan by the time they reach college age. But since these plans are relatively strict regulate As for the way the money can be used, the ramifications for simply withdrawing the money can be dire to yourself.

If you spend 529 money on unqualified expenses, you’ll pay a 10% penalty and income tax on the portion of the payout that includes the investment income. However, there are many ways to withdraw the money for education costs and not impose a withdrawal penalty. Here are your options.

1. Understand what qualifies as qualified expenditure

First of all, make sure you know exactly what expenses you can pay for with 529 plan savings. This includes tuition, fees, housing, meals, a computer, equipment, and books, if necessary for the student’s coursework.

If the student lives off campus, 529 funds can only be used up to the school’s official room and board allowance, as calculated at the school Participation costs for financial aid purposes. You can find this number on the school’s financial assistance website.

If you use the money on unauthorized spending, only the amount of the withdrawal that has grown (or earned) as a result of your deposit is subject to taxes and penalties. You will not be penalized for withdrawing your own original contributions to the plan.

2. Make use of the scholarship payment rules

If you have an additional 529 plan funds because your child received a college scholarship, there is an exception to the penalty rules that are tailored for you. You don’t have to pay the 10% investment income penalty when withdrawing funds up to your child’s scholarship. However, you will have to pay income tax on the income.

This means that families are probably still worth saving on a 529 plan, despite the risk that their child could eventually get a scholarship. The plan provides a way for your money to grow even if it eventually becomes taxed on withdrawal, like money in a taxpayer Brokerage account.

3. Use the money for graduate school

There is no time frame in which you need to use the money you saved on a 529 plan. It can stay in the account for as long as you want, but it may need to be used for the beneficiary’s educational costs to avoid taxes and penalties.

If there is a good chance your child might participate Commercial college– For example, you would like to study medicine or pursue a subject that requires a master’s degree. – You can keep the 529 plan funds and plan for your child to withdraw them in the future.

4. Change the beneficiary to a family member

Alternatively, you can transfer the money to another family member. While 529 plans have very detailed payout rules, they also offer generous opportunities to let another family member take over the plan. This person can then use the remaining amount for their own education costs.

For example, if your child was the original beneficiary of the plan, you can change the beneficiary to a qualified family member. This includes all of their siblings, parents, first cousins, nieces, nephews, or even their own spouse or child. In practice, as a parent interested in graduate school, you could become the beneficiary of the plan and use the funds for your own education. Or you can leave them there for a future grandchild.

5. Pay the K-12 education costs

529 plans don’t just have to be used for college expenses. The IRS allows up to $ 10,000 529 plan funds to cover public, private or religious school fees and fees of the K-12 for the beneficiary. Make sure, however, that your state allows this type of withdrawal from its plan.

If allowed, you can transfer the 529 plan to another child who, for example, is attending a private school, e.g. B. the sibling or cousin of the original beneficiary. Or, you can leave the money on plan for a future grandchild so they can use the money for either K-12 tuition or college expenses.

6. Pay back student loans

Another withdrawal option is to use 529 plan deposits to repay student loans. Up to $ 10,000 in 529 Plan Funds can be used to repay the plan recipient’s student loans, and an additional $ 10,000 can be used to repay loans held by siblings of a beneficiary.

That means any money left over on the original beneficiary’s plan can be used to pay back a sibling’s student loan. Or a parent could switch beneficiaries to themselves and use the additional plan benefit of 529 to repay loans they took on to cover the education of another child – or their own.

Bottom line

The complexity of 529 plans can make withdrawing your money as difficult as sticking to your savings goals. However, because of the many exceptions to these rules, there are many creative ways you can use your money wisely.