529 College Savings Plans Just Got Better!

 By Glenn J. Downing, MBA, CFP®

 529 College Savings accounts just got better! 

A 529 college savings account is one in which money is invested for a beneficiary’s future college expenses.  The account grows without taxation, and funds are eventually distributed with no federal taxation for the beneficiary’s qualified education expenses.  The growth never gets taxed!*  This is a huge benefit. 

 The states each sponsor a 529 plan.  Florida’s is the Florida Pre-Paid.  A parent goes online during open enrollment in the autumn and chooses an option:  tuition only, or tuition and housing.  Once enrolled, the parent pays a monthly fee.  The benefit is that the child goes off to college with all tuition paid for!  Fees and expenses are not covered, and those can be considerable.  The prepaid plan is best suited for a conservative investor.

 Most states 529 plans are of the mutual fund account variety.  For example, New Hampshire’s plan is sponsored by Fidelity.  You simply open a 529 account with Fidelity, and the funds can be used at any accredited post-secondary education provider in the 50 states.  That would be college and graduate school, as well as trade and vocational schools.  With this type of 529, the investment return is whatever the underlying mutual funds in the account return.  There is therefore substantial investment risk, but there can also be large return. 

 With the Tax Cuts and Jobs Act of 2017, up to $10,000 per year of a 529 account could be used for elementary and secondary education tuition.  This is tuition only, meaning no fees or other associated education expenses.  This continues to be a boon for those with children in private schools. 

 *that is, in Florida it doesn’t.  Other states may tax 529 account distributions. 

What's New With the Act?

 The 529 got even better.  Withdrawals are now allowed for costs associated with:

• home schooling
• registered apprenticeships
• up to $10,000 per beneficiary for qualified student loan repayments.

 Clearly home schooling has to do with pre-college years.  Homeschooling is not without costs, and the Act recognizes this.   Fees, books, supplies, and equipment expenses can come out of a 529 with no taxation.

 Registered apprenticeships is an expansion on the definition of any accredited post-secondary educational institution.  Now if your child comes out of high school and enters an apprenticeship program registered with the Department of Labor, associated fees qualify for a tax-free 529 distribution. 

 And the third benefit:  you’ve finished school.  You’ve taken out some student loans.  You can take a once-in-a-lifetime $10,000 tax-free distribution from the 529 account (assuming you’re the beneficiary) to reduce or pay off student loan debt.  This applies to both Federal and private student loans.

Further Considerations

Although the Act’s enhancements make 529 investing even more attractive, please be sure you don’t defeat your purpose!  If the primary purpose for saving in a 529 account is for college funding.  Too many distributions during the pre-college years, and there won’t be enough money left for college! 

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