Four Things You May Not Know About 529 Plans

As much discussion as there is about trying to control the cost of college education, just talk to any parent who is paying to deal with college that no gravity is defying this rising cost.  Amidst all of the projections you read on the college websites, when you add in the cost of your family travel, stops at the bookstore, and home care packages, the overall cost to send your child away for a four-year degree could cost you a long delay in your retirement.

In the mid 1990’s Section 529 of the Internal Revenue Code was created.  In 1997 (just twenty years ago) Section 529 was amended by the Taxpayer Relief Act, which provided a handful of higher education tax incentives including the deductibility of student loan interest.  We know how much children are struggling with student loans, and in 2001 the earnings on 529 plans became completely tax free if they were used for college.  As people learn more and more about the power of 529 plans, here are FOUR things you may not know about 529 plans.

  • 529’s MAY be eligible for private elementary or secondary school

A new tax law went into effect on Jan. 1, leaving states scrambling to implement provisions that let families tap state-sponsored college savings plans for private elementary or secondary schools without owing taxes on the withdrawal.

Uncle Sam has given families the green light to use $10,000 per child each year to pay for private schools out of 529 savings plans, but parents cannot count on states to give them the same tax break.  The key here is for you to check whether or not your state will allow you to use the earnings on your 529 plan tax-free for private or secondary school.

This law is a fairly new law, but one that you should consider closely if you have younger children that you are certain you will be sending to private school.

  • Your State MAY offer multiple plans

There is a great website Saving For College that ranks and rates the various plans in each state.  However, often financial advisors will sell clients a 529 plan that has a fee or commission attached to it without helping them understand that they may be able to get a similar plan where they won’t pay fees or commissions.  Recently, I ran into a situation in Ohio where I met someone who was paying a 5% up front commission to buy an Ohio plan when there was a similar plan that was offered at no up front commission.  The biggest one we see out there is that brokers will offer the Virginia Plan versus a client’s home state plan because there are commissions to be earned on the plan.  Some states like Georgia only offer a plan that can be bought direct and without any broker.  Often, 529 plans offer limited investment choices, so you will need to determine on your own if you need advisor assistance.  Make sure to do your homework in your state.

  • Be careful about off campus housing

529 Plans are eligible for room and board, but you should check your state’s plan to see what is covered for off campus housing.   When it comes to your child’s off campus housing, those expenses must not exceed the room and board allowance included in the cost of attendance determined by your college or university.

Generally, the amount that is allowable for room and board costs can easily be attained on the school website or contacting the admissions office.

If room and board is $3,500 per semester or $7,000 for the school year, you need to be careful if the rent for your son or daughter exceeds this amount when you report the withdrawals from the 529 plan.

  • You Can Be Your Own Beneficiary

Perhaps all of your children don’t use up the allotted amount you set up in the 529 funds.  Many people do know that you can change the beneficiary to a niece or nephew, but they don’t realize that they can name themselves as beneficiary as well.  This means if you want to go back for an MBA, executive education, or some additional college training, you could use those funds for your own development tax-free.

About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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