Put College Savings to Work After Graduation
Cashing out the money left in 529 plans, tax-advantaged college savings accounts, immediately after graduation doesn't make sense for all graduates.
There's no better way for students to keep their money working for them than by leaving it invested in their 529 plan account, Arkansas 529 Plan Project Coordinator Dale Ellis says.
"A lot of students don't stop with one degree," he says. Unless they elect to take that money out for a something other than a qualified expense, the money will continue to grow tax-free, he says. Withdrawing money for something other than a qualified educational expense incurs tax penalties, Ellis says.
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If a student decides to cash out a 529 plan to buy a car, pay rent or cover moving costs to a new city, the account owner could be charged taxes on the earnings and pay a tax penalty. If audited, the owner of the account has to prove money was withdrawn for a qualified education expense.
If $10,000 remained in the account for 10 years postgraduation and the investments grew at an annual rate of 5 percent, the graduate would earn more than $6,000 that wouldn't be taxed.
Whether or not the student is going to graduate school, at some point he or she will likely need some sort of continuing education to remain competitive in the workforce 10 to 20 years into the future.
"Lifelong learning will be the new normal for most of us - especially during our working lives," says American Association of Community Colleges spokeswoman Norma Kent.
To preserve funds for the future, graduates should consider long-term investment strategies, experts recommend.
"In the case of someone thinking of keeping the account and using it 20 years later, they should typically choose investments that tend to be better performers over the long run," says Jason Washo, an Arizona-based certified public accountant and personal financial specialist.
[Find out how to use college savings for graduate school.]
Since the money won't be needed for a number of years, account holders can take a little more risk by investing in long-term stock-based investments, which typically increase more in value than an investment plan of money markets, savings accounts and short-term bonds, he says.
Recent graduates should consider the length of time until they plan to use remaining 529 funds for continuing education in their career field. They should ask former professors and professionals in their fields how often and what kind of continuing education they'll need over the course of their careers.
Grads entering technology fields, for instance, should think about investment strategies such as keeping investments in shorter duration bonds.
"In key industries such as energy and IT, which pervades most other industries, workers will need ongoing education to keep up with constant change," says Kent. "And many emerging fields such as nanotechnology and cyber security continue to evolve."
[Get savings tips for adults returning to school.]
Graduates who don't choose to use 529 plan funds for continuing education could take fun courses, like dance or painting. They can withdraw money for hobby courses without paying a tax penalty, says Joe Hurley, founder of Savingforcollege.com.
As long as the course is taken at an eligible educational institution as defined by the Department of Education, a student could withdraw money tax free from a 529 plan.
With permission from the owner of the 529 plan, which could be a grandparent or parent instead of the student, beneficiaries can be changed at a later date. The graduate may ask for the beneficiary to be changed to his or her spouse or to a child.
If there's any chance the money will be needed for education in the future, there is no reason to cash out remaining funds.
"No one's forcing them to take it out of their 529 plan," Hurley says. "There's no reason to not leave it in the 529 to keep growing it tax free."
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
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