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529 Plans

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As parents, you believe in the value of a good education. You are concerned about the cost of a college education and want to provide financial assistance to your children. What is the best way to provide the support? A 529 plan may be the answer.

What is a 529 Plan?

A 529 plan is an account specifically designed to help you save for college or K-12 education-related expenses. You make contributions to your plan using after-tax dollars, but earnings are tax-deferred while invested and tax-free when used for qualified higher educational expenses (see table below).

How much can I contribute to a 529 Plan?

The IRS does not place any limit on the amount an individual can contribute to a 529 plan in a given year. There are restrictions on the amount that can be contributed in total. 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000.

Tax Treatment and Penalties

Contributions to a 529 plan are made with after-tax dollars. Earnings within a 529 plan occur on a tax-deferred basis.

Distributions to pay qualified expenses (see chart below) are tax free.

Several states offer favorable 529 tax treatment. Most of the states require you to participate in that states 529 plan. However, there are seven tax parity states that offer a state income tax benefit for contributions to any 529 plan:

  1. Arizona
  2. Arkansas
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Pennsylvania

For non-qualified expenses, he earnings portion of the distribution is taxed at the beneficiary’s rate. Non-qualified distributions may be subject to a 10 percent tax penalty, except when the beneficiary dies or becomes disabled, or receives tax-free scholarship, veterans’ education assistance or employer-provided tuition assistance, among other exceptions.

What expenses can I use for 529 funds for?

ExpenseDoes it Qualify?
Tuition and FeesYes, up to the full amount of college tuition and required fees. Limited to $10,000 per year for K-12
Books & SuppliesFor college expenses only
Computers & Internet AccessFor college expenses only
Room & BoardFor college expenses only, if the student is enrolled at least half-time. Qualified room and board expenses for an off-campus student are limited to the allowance reported by the college in its “cost of attendance” figures.
Special Needs EquipmentFor college expenses only
Transportation & Travel CostsNo, costs associated with transportation to and from campus, such as airfare or gas, are not qualified education expenses.
Health InsuranceNo.
 
Health insurance and transportation costs are only considered qualified expenses if the college charges them as part of a comprehensive tuition fee, or the fee is identified as a fee that is “required for enrollment or attendance” at the college.
College Application & Testing FeesNo.
Extracurricular Activity FeesNo.
Student LoansYes
 
With the passage of the SECURE act of 2019, 529 plan account owners may now withdraw up to $10,000 tax-free for payments toward qualified Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction

What happens if all the funds are not spent?

Transfer or roll over the account to pay qualified education expenses for other beneficiaries (including yourself or other family members of the beneficiary)

Withdraw the money from the 529 education savings account entirely (in which case the earnings portion of the withdrawal, if any, will be subject to federal income taxes, and possibly state and/or local taxes, and potentially a 10% additional federal tax).


Disclosure

Michael Lewis, Registered Representative. Securities offered through Cambridge Investment Research Inc., a Broker/Dealer member FINRA/SIPC. Tutor Financial, LLC, and Cambridge are not affiliated.

Investment Advisory Services offered through Independent Advisor Representatives of Cambridge Investment Research Advisors Inc, a Registered Investment Adviser

Investors should carefully consider investment objectives, risks, charges, and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses, and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state’s 529 plan, investors should consult a tax professional. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.

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