The COVID-19 pandemic has upended the higher education plans for millions of college students who have opted to take a gap year or live at home while classes for the Fall semester move online. For many, those decisions will impact how they use funds accumulated in 529 college-savings plans.
529 plans provide families at all income levels with a tax-advantaged method for funding their children’s future education. Generally, contributions are invested and allowed to grow free of federal income tax when withdrawals are used to pay qualifying higher-education expenses, including tuition and fees for an undergrad or graduate school student; room and board, subject to limitations; computers, related equipment and internet access; and textbooks and other required school supplies. Earnings withdrawn for non-qualified expenses are subject to a 10% penalty and ordinary income taxes. However, thanks to last year’s passage of the SECURE Act, families have more options for using their 529 savings this year and going back to the start of 2019.
The SECURE Act expanded the eligible use of tax-free 529 education plan withdrawals to include expenses related to apprenticeships or job-training programs, including the purchase of required equipment and supplies; up to $10,000 to repay student loans for the plan beneficiary or for one of his/her siblings; and/or up to $10,000 per year for a child’s K-12 tuition at a private school or religious school.
This additional flexibility to the use of 529 savings should be welcome news to families whose children may have changed their college plans in light of the coronavirus. For example, account owners may change the 529 plan beneficiary to another family member, such as an older brother who may need help paying off their student debt or a younger sister who plans to pursue an advanced degree in the future. Account owners may even name themselves as beneficiaries when they wish to go back to school to improve their professional skills or to pursue another career field.
One critical point that families should remember in the current environment is that any 529 funds a university gives back to a plan beneficiary due to a coronavirus-related campus closure must be redeposited in the plan unless those funds will be used for another qualifying education expense during this year. Failure to transfer these refunds back into account plans may result in taxes and penalties.
Amid all the uncertainty created by the global health crisis, consideration should be given to how children will afford a college education and/or career training that will serve them for the rest of their adult lives. If you avoid planning or you put your existing plan on hold for the time being, you may not achieve your intended goals. Instead, use this time to meet with a financial advisor to help you identify the education-savings plans and strategies that meet your changing needs and budget.
About the Author: Sean Deviney is a CFP®* professional and a director and financial advisor Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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Sean Deviney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. Raymond James does not provide tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should carefully consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. Investments mentioned may not be suitable for all investors.
The information contained in this report has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.