3039: Savings Tax Breaks for Middle America 529 Plans by Harry Stout of Financial Verse

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[00:00:50] This is the fourth and final installment of our series on savings breaks for middle class Americans. A 529 plan is a special incentive created by Congress to help families educate their children. Let's learn more about this valuable provision.

[00:01:06] A 529 college savings plan is an investment account that offers tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified education expenses. The 529 plan can also have financial aid benefits. 529 plans may also be used to save and invest for up to $10,000 in annual kindergarten through grade 12 tuition payments in addition to college costs.

[00:01:34] There are two types of 529 plans, college savings plans and prepaid tuition plans. Almost every state offers at least one 529 plan. There is also a 529 plan operated by a group of private colleges and universities. 529 plan tax benefits Much like a Roth IRA, contributions to a 529 plan are made with after-tax dollars and are not deductible for federal income taxes.

[00:02:03] However, the majority of participating states offer state income tax deductions or tax credits for contributions to 529 plans, though you may be restricted to investing in your home state's 529 plan in order to claim the benefit. Funds in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn for qualified education expenses.

[00:02:28] The funds in a 529 plan are yours and you can always withdraw them for any purpose. However, the earnings portion of a non-qualified distribution, not for qualifying educational expenses, will be subject to ordinary applicable federal and state income taxes and a 10% tax penalty, though there are exceptions. Since your original contributions were made with after-tax money, they will never be taxed or penalized.

[00:02:56] Types of 529 plans 529 plans are usually categorized as either prepaid tuition or college savings plans. College savings plans work much like a Roth 401k or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. The 529 college savings plan offers several investment options from which to choose.

[00:03:22] The 529 plan account will go up or down in value based on the performance of the selected investment options. Prepaid tuition plans let you prepay all or part of the cost of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 plan is a separate prepaid plan for private colleges sponsored by more than 250 private colleges.

[00:03:51] Educational institutions can offer a prepaid tuition plan but not a college savings plan. What education-related expenses are covered? At the college or post-secondary level, a general rule of thumb is that expenses required for enrollment in an eligible institution are covered. There are some costs, however, that you may believe are necessary, but the IRS doesn't consider a qualified expense.

[00:04:17] For example, a student's health insurance, transportation costs, and student loan payments are not considered qualified expenses. Qualified expenses do include tuition and fees, books and materials, room and board for students enrolled at least half-time, computers and related equipment, internet access, and special needs equipment for students attending a college, university, or other eligible post-secondary educational institutions.

[00:04:44] The 2017 Tax Cuts and Jobs Act also expanded the allowable use of 529 plan assets by permitting tax-free distributions of up to $10,000 per year per beneficiary to pay for kindergarten through grade 12 tuition expenses at private, public, and religious schools. Changing Circumstances

[00:05:08] When it comes to putting money into a 529 plan, many parents are concerned about what will happen in the future when their child is ready to attend college. In particular, some parents worry about losing the money they've saved in a 529 plan if their child doesn't go to college or gets a scholarship. There are a myriad of situations that can arise in the future, such as the death of a child, the receipt of full academic or athletic scholarships, or the receipt of employer educational assistance.

[00:05:38] These and many other situations require research and understanding of the regulations surrounding 529 plans. A good online source is the website savingforcollege.com. This website covers the gamut with all issues related to 529 plans and is a great place to start your research. Remember, you can withdraw leftover money in a 529 plan for any reason.

[00:06:02] However, the earnings portion of a non-qualified withdrawal will be subject to taxes and a penalty, unless you qualify for one of the exceptions in the regulations. If you are contemplating a non-qualified distribution, be aware of the rules and options rules for reducing taxes owed. My advice is to consult your personal tax advisor before taking such a withdrawal.

[00:06:26] There are a number of key tax advantage savings provisions that Congress has established to help primarily middle-class families save for life's key events. It's up to you to know them and decide if they can help you reach your financial goals. You just listened to the post titled Savings Tax Breaks for Middle America 529 Plans by Harry Stout of FinancialVerse.com.

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[00:08:16] Now take this with a grain of salt, because I got a full academic scholarship and took out loans for living expenses, but I do have a sense of pride in figuring it out for myself. And I always thought that if I did have kids, I would want them to have a similar experience. I remember being annoyed in school by the kids who didn't value their parents covering the cost of their education. Perhaps if they had to cover it themselves, they wouldn't change majors five times,

[00:08:44] or they would put that degree to work in a higher paying field versus staying at their restaurant job. I know I'm oversimplifying, and as someone who graduated college in 2009, I recognize how hard it is to get an entry-level position in a tough economy. It can be argued that the cost of higher education these days makes it impossible for young people to pay their own way. But perhaps if they had to pay for it, they'd be forced to consider the return on investment of that education.

[00:09:13] Look, if you do decide that it's important to you to pay for your child's education, I would just encourage you to first make sure that you're set on your own financial goals. If paying for college is going to risk your own retirement or put you further into debt, perhaps it needs to be considered further. Your child can take out a loan for school. You, however, cannot take out a loan for your retirement. It's great to help your offspring get a good start to their adult life,

[00:09:42] but who's to say they will be in a financial position to help you when you're in your elder years? And that should do it for today. Have a happy rest of your day, and I'll see you on the Friday show tomorrow, where your optimal life awaits.