School daze: What are the rules on using the funds in 529 college savings accounts?
Q: Both my children have 529 college savings accounts. My younger daughter just started college. My older son just graduated from college and is doing an apprenticeship. Should we use the funds in their 529 plans? What are the rules?
A: The 529 plans may be used at trade schools and other educational institutions approved by the Department of Education. Eligible expenses include tuition, mandatory fees, computer equipment, textbooks, supplies, internet service, trade tools and costs associated with required apprenticeships.
If you use a 529 account for health insurance, extracurricular activities, college applications, testing fees or fraternity or sorority memberships, there may be a 10% penalty on the earnings plus federal, state and county taxes. Students must be enrolled at least half time to use 529 funds for room and board.
We often recommend using 529 plans as soon as there are any qualified expenses. These accounts are usually invested based on the student’s age, so by the time the beneficiary reaches 18, the account is often conservatively invested.
In 2018 the rules were updated to include kindergarten through 12th grade tuition. Qualified student loans can also be paid, and 529 ABLE accounts may be funded, up to $10,000 per year.
A 529 plan doesn’t need to be distributed when the beneficiary reaches a certain age. It’s possible to use a 529 account to cover costs for continuing education that is required to maintain a professional license — such as accounting/finance and nursing/medical as well as education/teaching — if the continuing education is eligible for Title IV federal financial aid.
Currently, the Certified Financial Planner Board of Standards is backing legislation that will allow 529 plans to pay for education and training related to this designation. The American Institute of CPAs is also backing a bill that will allow 529 funds to be used to pay for expenses, fees and costs related to the Uniform CPA Examination.
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Starting in 2024, Roth IRA transfers will be permitted for 529 accounts that have been around for at least 15 years (minus any contributions made within the last five years). These 529 transfers will be limited to the IRA contribution annual limit ($7,000 in 2024, plus $1,000 catch-up) after deducting any traditional or Roth IRA made that year. No double contributing! The 529 to Roth has a lifetime limit of $35,000.
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The IRS allows tax-free transfers to other family members of the beneficiary. IRS Publication 970 broadly defines family as a spouse, children, siblings, parents, cousins, and even some in-laws.
When a beneficiary is eligible and receives funds through a veteran’s educational assistance program, the account owner may withdraw the equivalent amount of the grant from the 529 and avoid the 10% penalty. The earnings of this withdrawal will be subject to federal tax.
Watch the dates: Withdrawals from the account must be done the same tax year as the qualified education expenses are incurred.
Even with rules, a 529 is still a tax-smart way to save for college. The (after tax) money is deposited into the account and all the growth and earnings are tax free when instructions are followed.
The IRS permits individuals (think grandparents) to make a one-time lump-sum contribution to a 529 plan and considers it as if it were spread evenly over five years. The annual gift tax exclusion applies to these accounts, and this year the amount is $17,000 per donor, per beneficiary. The IRS allows a contribution of 5X or $85,000 (individual) in a single year without facing gift tax consequences. Double that to $170,000 for a married couple.
Fund the 529 accounts early, invest wisely using age-based rebalancing, and use these funds for qualified educational expenses. This is a tax-smart way to set up the next generation for success. And don’t overlook the Florida Prepaid!
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com.
For informational and educational purposes only. Individuals should speak with a qualified financial professional based on their own circumstances to determine if the above is appropriate. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth® R-23-6058.
This article originally appeared on Florida Today: Lesson plan: Here are the rules on using 529 college savings funds
