529 College Savings Plans

It’s summer, the weather’s getting hotter. And many families are thinking about college. Some have kids or grandkids who just graduated from high school and are on their way to college in August or September. Others have younger children or grandchildren and want to stash away a nest egg to help fund their future higher education expenses.  529 plans are a great college saving option. And surprise…they are not just for college.  Let’s focus on the ins and outs of these plans.

Contributions to 529 plans are treated as gifts to the beneficiary, but with a special twist. You can shelter from gift tax up to $75,000 in contributions per beneficiary this year ($150,000 if your spouse joins in). If you contribute the maximum, you will be treated as gifting $15,000 (or $30,000) to that beneficiary in 2020 and in each of the next four years…2021 through 2024.

You can’t deduct contributions to 529 plans on your federal tax return. But many states give residents a deduction or credit on state tax returns for payments made to their state’s 529. Maximum deductions and credits vary by state.

Distributions from 529 plans used for college are tax-free. Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers, and internet access. Funds can be withdrawn tax-free to cover off-campus housing, food, and utilities, but the payout can’t exceed the room and board allowance that the college includes in the cost of attendance. You should be able to get this from the school’s website.

What if the beneficiary decides not to go to college? There are options for the unused 529 funds. Distributions can be taken tax-free to pay for fees, books, and supplies for certain apprenticeship programs. Or you can roll over the money in the child’s account to a 529 college savings plan for another family member.

529 plans can help pay for K-12 education as well. Tax-free payouts of up to $10,000 per student per year can be taken from the 529 accounts to pay tuition for elementary and secondary private and parochial schools.  Note that the $10,000 cap doesn’t apply to 529 plan withdrawals to pay for college. The state tax treatment of distributions from 529 plans for K-12 education doesn’t always follow federal law.  Nonconforming states include California, Minnesota, Montana, New York, Oregon, and Vermont. Make sure to check the tax implications in your state.

You can also use up to $10,000 total in 529 funds to pay off college debt.

Keep this rule in mind if you use 529 funds for your kids’ education. And the money is refunded because the school closes for COVID-19 concerns.

The tax law waives tax and penalties if after a distribution is made from a 529 account, the student gets a refund from the school. To get relief, you must redeposit the funds into a 529 account with the same beneficiary within 60 days of receiving the refund.

The Kiplinger Tax Letter
June 2020