Don’t sweat the 529 regret

Posted In: Saving

The benefit of 529 college savings plans is the opportunity for tax-deferred investment growth, and tax-free withdrawal, provided that the money is allotted for higher education purposes. It’s no secret that college is expensive, so getting an early start on saving is preferrable. Yet for many, a 529 plan can seem daunting – even risky. This is because, when getting a jump start on saving, the exact cost of college isn’t always known, and a common concern is saving too much in an account that may not seem as accessible as you’d like.

 

If the funds are withdrawn to be used for purposes not related to higher education, those funds do become taxable income and are also liable for a 10% early withdrawal penalty. Understandably, given the restrictions, families may worry about accruing more funds than necessary and suffering tax penalties when they finally attempt to withdraw the funds. However, there are alternative uses for 529 plan funds that do not result in tax penalties:

 

  1. Reallocate the funds to another beneficiary. Typically, this is especially helpful in families with multiple children, so that if an older child doesn’t need all the funds in a 529 plan, perhaps a younger sibling seeking higher education will. The funds can also be used for a parent or older sibling who wishes to obtain a degree in higher education. This option could also apply to future family scholars and be used to establish a multi-generational “529 dynasty” college savings plan for potential grandchildren.

 

  1. If the child (or one of their siblings) is attending private kindergarten through twelfth grade school, it may be possible to use up to $10,000 a year to cover the costs. After all, some students may decide early on that they do not wish to attend college. Therefore, their grade schooling (or that of a sibling) can be paid for utilizing a portion of 529 funds.

 

  1. If an older child took out loans to assist with the cost of their education, $10,000 of 529 funds can be allocated to help pay off those loans, because they were incurred due to education.

 

  1. If scholarships are granted to the student, the amount of the scholarships can be withdrawn from the funds in the 529 plan. The earnings portion will be taxed, but the beauty of this option is that the withdrawn funds can then be reallocated to another more flexible account.

 

  1. Don’t forget that eligible expenses covered by 529 plans include more than just tuition! 529 funds can be utilized for room, board, school supplies, registration fees, a computer, or books. Additionally, studying abroad at eligible institutions can qualify as an expense eligible for 529 plan coverage. Room and board fees don’t apply to just on-campus housing either. Using 529 funds to assist in off-campus housing can be a huge financial help to students (and their parents!)

 

Perhaps the best decision may be to accept that there will be a tax penalty, and simply reclaim your funds. The taxes are on earnings, not principal, and it may make the most sense financially to pay the taxes.

 

Ambassador Advisors can help you navigate the process of establishing a 529 college savings plan, allocating funds, or closing the plan out entirely. Using those funds wisely is part of striving for good stewardship with your resources, both in the short-term and for years to come.

 

Sources:
https://chiefmomofficer.org/2021/04/05/saving-too-much-for-college-in-a-529-now-what/https://www.sec.gov/reportspubs/investor-publications/investorpubsintro529htm.htmlhttps://www.forbes.com/sites/kristinmckenna/2021/01/19/are-you-saving-too-much-for-your-kids-college/?sh=7ee1171072f4

Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments and account fees would apply to your particular situation. To determine which college saving option is right for you, please consult your tax and accounting advisors.Municipal fund securities are sold by offering statement only, which is available from your registered representative. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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