529 plans, or college savings plans, are a great way to save for a loved one’s future education, while also providing the benefits of a tax-advantaged savings plan. Too often, however, those who utilize 529 plans have leftover funds when their student graduates from college. Whether it be due to scholarships or early graduation, when left with funds in a 529 account, many 529 account holders feel that their only option is to take a non-qualified distribution and the 10% penalty, as well as incu income tax. Fortunately, there are other options for those 529 account holders with leftover funds. Even better, a few new options may be coming in the future.
Funds withdrawn from a 529 account are typically used for “qualified education expenses”, meaning that those funds are tax-free if used to pay for qualified educational expenses, such as tuition, room and board, or textbooks. To qualify as an eligible expense for a 529 plan, the cost must be incurred while the student is enrolled in school on at least a half-time basis.
The SECURE Act of 2018 allows families to take tax-free 529 plan distributions to pay off student loans. However, the portion of student loan interest paid with 529 account funds will not be eligible for a student-loan interest deduction in the same year.
Account owners also have the option to reallocate those funds to the education of another loved one, either by changing the beneficiary of the 529 plan or by taking a tax-free distribution of up to $10,000 to pay student loans for the siblings of the beneficiary. Of course, account owners also have the option of leaving the funds in the account for any further education, such as post-graduate degrees. Most are not aware that this also includes certain apprenticeship programs that are approved by the Labor Department, which may also come with college credits or job training.
The Helping Parents Save for College Act, introduced originally in 2019 and re-introduced to the Senate this year, would allow a little more flexibility to families with leftover 529 accounts. The Act proposes that 529 account owners be able to put those funds into a retirement account for the beneficiary, as well as provide an incentive for more families to take advantage of a 529 account with a substantial tax credit.
If you have a 529 account with leftover funds, or you believe you will have leftover funds after your child’s education has finished, contact The Law Offices of Tyler Q. Dahl today and let’s see how we can make the most of your situation.
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