529 Education Savings Plans Updates
Provided by American Financial Advisors, LLC
For a while now 529 plans have been a tax-advantaged way for parents and grandparents to accumulate funds for a child’s college costs. The Secure Act, which was enacted last year and largely dealt with changes to retirement plans, has made 529 plans even more tax advantageous.
The accounts now have expanded uses for student loan repayments and apprenticeships. These are In addition to earlier changes in 2017 that allow up to $10,000 annually of 529 money to be used for private-school K-12 tuition - all of which provide more flexibility in using 529 accounts.
A brief overview of 529 Plans
Named after a section of IRS Code, these accounts were created in 1996. Money deposited in these accounts is invested in exchange traded funds or mutual funds on a federal after-tax basis - similar to Roth IRAs. Money withdrawn from the plan is not taxed as long as the withdrawals are used to pay for qualified educational expenses for a beneficiary – in an undergraduate or graduate program at an accredited institution.
The expenses include tuition, books, computers, internet access, supplies, equipment and fees.
Several states offer state income tax deductions or credits as well.
The Secure Act makes it easier to deal with excess funds in a 529
Now with the Secure Act, families can use up to $10,000, a lifetime limit, of the excess in a beneficiary’s account to take tax-free 529 plan distributions for the beneficiary’s student-loan repayments. Both principal and interest on an education loan are now considered a qualified 529-plan expense. However, the student-loan interest is not eligible for a deduction when filing federal income-tax forms.
In addition, up to $10,000 per sibling can now be used to repay the student loans of each of the beneficiary’s siblings, including stepbrothers and stepsisters along with brothers and sisters. This way, leftover funds in a 529 account can be used to make student-loan payments.
Grandparent-Owned 529’s
When a grandparent owns a 529-plan account, distributions are considered untaxed income on the Free Application for Federal Student Aid (FAFSA). That income can reduce a beneficiary’s financial aid package by as much as 50% of the value of the distribution.
To avoid this penalty, the grandparent can delay making a withdrawal until January 1st of the student’s sophomore year, when the distribution will no longer affect untaxed income on the FAFSA if the student graduates in four years.
