What Does a 529 College Savings Plan Cover?


529 college savings plans are only eligible for spending on certain expenses

Jjar of money labeled collegeThe cost of attendance at American universities is skyrocketing year after year, with a college education now costing up to six figures. 529 college savings plans offer a tax-free way to save money for your education. However, there are a few conditions since the money is tax-free, including what you can spend that money on. Here are a few of the qualified expenses included in the plan.

Tuition and education fees
Of course, the most obvious college expense is tuition. Any of your 529 savings money can be applied toward basic tuition. Many colleges charge mandatory fees such as application fees and additional course fees, and your savings plan can be used on those as well.

Keep in mind that your savings plan can only contribute to mandatory fees. Writer for Washington’s Top News, Nina Mitchell, warns against the use of 529 savings funds for fraternity and sorority membership dues or club and activity fees. “These are considered extracurricular and are not eligible,” says Mitchell.

Textbooks, computers and school supplies
Alongside the rise of tuition prices, textbook prices are also increasing each year. According to Brian Boswell, contributor at Forbes.com, your savings plan can be applied toward textbook rentals and purchases each year. You can also put your savings money toward school supplies, including items like pencils, pens, backpacks and notebooks.

Modern-day education often requires students to have their own personal computers or laptops. With advancing technology, laptops are more expensive than ever. Laptops and desktop computers can be purchased through your 529 savings plan, says Boswell, easing the burden of buying new, up-to-date technology. Printers are also covered under the plan.

Room and board
Your housing costs as a student are covered under your 529 savings plan as well. Whether you live in a campus dorm and are paying for student housing, or if you pay rent off-campus, your savings money can be used for your rent and utilities. While you’re a student, your savings money can also be applied to your dining plan and grocery costs.

However, Boswell explains there is a catch to off-campus living, “To be considered qualified, [off-campus living] costs must be less than or equal to the room and board allowance from the college’s cost of attendance figures. If the total cost living off-campus exceeds the school’s allowance, the student would have to pay the difference using funds from another source.”

If your university charges a fee for internet usage, or if you live off campus and have to purchase an internet package yourself, you can pay those expenses out of your 529 savings plan. Additional software deemed necessary for your education is also covered.

Disability equipment
If you have a disability that requires medical or mobility equipment, you can purchase those items with the money in your 529 savings plan, says Boswell. These items include wheelchairs, prosthetics and transportation costs.

Saving and paying for college tuition alone can be stressful enough, but having to worry about additional school-related expenses just adds to the frustration. Luckily, these expenses are all covered under your 529 savings plan. Consult your tax advisor regarding your personal situation and the possible impacts and benefits of this type of program.

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New Purchasing Rules for 529 Plans

Purchasing computers and computer-related equipment with your 529 plan

Aside from tuition, books and housing, New529Rules_062116a computer can be one of the biggest expenses when starting college. Many students find that their new college lifestyle and coursework necessitate the purchase of a new computer.

In 2009 and 2010, funds from 529 plans could be used to pay for computers, which was a big help to students and their families. After that, however, computer purchases were allowed only if the educational institution specifically required the computer for attendance.

Fortunately, a new law passed at the end of 2015 reinstated the permission to use 529 funds for computers, whether or not they are explicitly required by the school. Although the legislation extended retroactively for all of 2015, that does not mean you can withdraw funds to pay for a computer purchased in 2015 now that it’s 2016.

“Most tax advisers tell their clients: ‘Make sure your expenses and distributions occur in the same year,’” states Jamie Canup, partner and chair of the Hirschler Fleischer tax practice in Richmond, Virginia, who was interviewed by U.S. News & World Report.

“The rules aren’t clear once you cross the calendar year,” states Deborah Ziff for U.S. News & World Report. “…but Canup says he wouldn’t risk trying to do it now that it’s 2016.”

If you missed out on getting tax benefits for a computer purchased last year, there are plenty of other advantages to the new legislation, and it is permanent for future years. Plus, the definition of a computer includes tablets, such as the iPad. Funds can also be used to purchase peripheral equipment, which includes a printer and scanner. Educational software is also eligible, but computer games are not.

“Peripheral equipment is defined as auxiliary machines designed to be placed under control of the central processing unit of the computer,” according to Ziff. “Exceptions include typewriters, calculators, adding and accounting machines, and copiers.”

In order to cash in on these new benefits, you must keep in mind some additional rules. First of all, the student must be the primary user of the computer and any peripheral equipment.

Furthermore, in addition to being the primary user, the student must be enrolled in an eligible educational institution. Another technicality to consider is that your internet access may be part of a bundle with other noneducational services, such as cable. If this is the case, it is best to speak to a tax professional to determine how to handle the bill.

“The legislation does two other things regarding 529 plans: It allows account owners who take a withdrawal but then get a refund from the school — for instance, because their child gets sick and has to drop out for the semester — to redeposit that money in the 529 plan within 60 days with no penalties,” states Ziff. “It also changes reporting standards that apply to account holders with more than one plan per beneficiary.”

Previously, 529 account administrators aggregated all accounts that had the same holder and beneficiary. New rules state that each 529 plan needs to keep its own discrete ratio of earnings and contributions. This is a good thing, because it allows account holders to decide exactly where they want to withdraw funds from.

“This matters because only earnings are subject to taxes and penalties for withdrawals that don’t qualify as educational expenses,” reports Ziff.

Although it isn’t necessary to give any special documentation to the administrator of your plan when you make a withdrawal, you do need to maintain and save records of your expenses and purchases, including the date and price of each. This information needs to be saved in your tax records.

“If the withdrawals were for eligible expenses, you don’t need to do anything when you file your taxes — just keep the 1099-Q form and your receipts in your tax records,” according to Lankford. “The 1099-Q will specify which portion of the withdrawal is considered principal and which is earnings.”

So, if you already have a 529 plan, keep this information in mind to get the most bang for your buck, and if you are looking for a new plan, make sure to talk to your financial adviser to find the best one.

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Common Misconceptions About 529 Plans

What you should know about saving for college with a 529 Plan

Helping your childbankingon_e_a002986918 decide where to go to college can be confusing, but understanding your investment options to help pay for it doesn’t have to be. Some simple knowledge about savings plans can help make the process easier. A 529 Plan is one of the safest and most flexible ways to save. The following information can help you clear up some common misconceptions about 529 Plans.

Short term investments aren’t worth it
Some people feel that if their child is going to school in the next few years, or if they themselves are interested in continuing their education in the near future, that a 529 Plan is pointless. This is not the case.

“While it is true that there’s not much opportunity for the money saved in a tax-advantaged investment account to grow if the money is only in there for a year, it’s a myth that there’s no point in adults saving for their own education to put money into a 529 plan,” according to the U.S. News & World Report. “Savers who want to start school in the fall of 2015 should start saving before the fall semester this year.”

Be sure to carefully review the withdrawal guidelines and minimums of a plan before you begin investing. When you find one that meets your needs, you can begin reaping the benefits right away.

“We have a $1,000 tax credit that can be taken right off their income tax,” states Jodi Golden, executive director of the Indiana Education Savings Authority, which has a College Choice Direct 529 Plan that only requires money stay in the plan for 12 months.

There are restrictions imposed by which state the plan comes from
Although many people choose the 529 Plan offered by their own state, you may actually use any state’s plan. The reason so many people pick their home state’s plan is because it can offer more tax benefits.

“Many states give you a state income tax break if you use the plan offered by your home state,” states Dan Danford, CEO of Family Investment Center. “If you don’t like the plan your state offers, you may not get the state income tax breaks, but you still get all the benefits of tax-free accumulation and withdrawals.”

There is one other common myth regarding the flexibility of state plans. Some people are aware that they can choose another state’s plan, but believe that their child must then go to school in that state. Fortunately, your child can go to school wherever they desire, and you can choose a plan from whichever state you prefer.

“There is no restriction or requirement to use 529 assets for a school (in a state) in which the taxpayer or beneficiary resides,” says Mary McConnell, director of college savings products for Charles Schwab in San Francisco.” People can use that money for qualified expenses for any school that’s been accredited for financial aid, and that includes many international programs.”

You can’t change beneficiaries
Many people are worried that they will be penalized for changing beneficiaries if one child decides not to go to college. This may inhibit parents from starting to save early, which is the best way to save. Investors can rest assured, however, because there are no tax penalties for changing beneficiaries.

“While there are tax penalties for taking out money from 529 plans to pay for things that are not considered qualified education expenses, there isn’t a tax penalty for changing the beneficiary,” according to the U.S. News & World Report. “Adults who own an account for a college-age student can change the beneficiary to themselves, especially if the student has finished college.”

You lose control of your investment
Some people may be wary of investing in a 529 plan because they do not want to give up control of the money they have saved for their child to attend college. After working so hard to save, many parents are afraid that their student will use the money unwisely, so they hold onto their funds in their own savings account. The fact of the matter is, however, that you can stay in control of the distributions.

“Each account has an owner (or joint owners) and that person controls the assets, regardless of how many people contribute,” according to Kiplinger. “The owner doesn’t have to be a parent.”

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Where to Begin With College Savings Plans

A 529 plan is an affordable, convenient option to help families save for college

College and university costs are increasing nationwide, and many families are considering numerous solutions to prepare for these expenses.

A 529 plan is ideal for those who want to save money quickly, and you can enjoy the following benefits from this option:

• Tax-free funds. All money in 529 plans increases federal and state income tax-free. In addition, all withdrawals used for qualified education expenses are exempt from federal income tax, and many states exempt state income tax for specific college and university costs.
• Low contribution limits. Regardless of a family’s income level, many 529 plans feature low contribution limits that make them worthwhile. In some states, minimum limits are as low as $15.
• Money can be used at many schools. A wide variety of accredited colleges and universities around the country will accept 529 plan funds. The money can be used to cover many student essentials, including book, housing and tuition fees.
• Enhanced protection. Many 529 plans are protected against bankruptcy. In fact, some of these plans enable participants to contribute $300,000 or more.
• Easy setup process. Within a short period of time, families can establish 529 plans that will deliver benefits for years.

How to establish a 529 plan
Professional financial advisors help families develop investment strategies to meet students’ needs. These experts will provide details about two types of 529 plans:

Prepaid plans.
With prepaid plans, participants pay for a year (or a portion of a year) of tuition in advance, which locks in the price. These plans are becoming increasingly valuable because many schools raise their costs annually, and those who can lock in tuition expenses can effectively manage their budgets, no matter how much tuition expenses increase by the time a student enrolls.

Investment plans.
By using these plans, participants can decide how to invest their funds. Meanwhile, investment plans also enable people to determine how to use that money (and the earnings it generated) for numerous educational costs at a variety of higher education institutions.

Enrollees in 529 plans can make a lump-sum contribution of up to $65,000 per beneficiary or $130,000 if married filing jointly and avoid incurring a gift tax on this amount by electing to use five years of the annual gift tax exclusion all in one year. If they take advantage of this provision, the annual exclusion cannot be used again for the same beneficiary until the five-year period has passed.

Learning about the benefits of 529 plans is the first step to help families save money. Qualified financial professionals offer guidance to ensure that participants get the support they need so these enrollees can attend their dream college or university.

Used with Permission. Published by IMN Bank Adviser
Includes copyrighted material of IMakeNews, Inc. and its suppliers.