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Closer to College - Key 529 Plan Facts


Closer to College – Key 529 Plan Facts

You have saved for many years into your child’s 529 plan and now you and your child are on the verge of college tours and applications to decide where your child will spend the next 4 years of their life.  Now is a good time to familiarize yourself with some of the nuisances of 529 plans as you enter this next stage of college planning.

How should my 529 account be invested as we get closer to needing the funds?

It is now time to consider making some adjustments to the 529 plan investment portfolio and prepare yourself for the distribution of those funds. First, let’s think about the allocation of the funds in the 529 accounts. For the past several years, the appropriate allocation of your child’s 529 assets has been 100% equities or in close proximity to the most aggressive allocation, as your child’s college years were in the distant future. But now that time horizon has shortened, and you need to think about matching the timing of the withdrawals to the risk of the account. Federal law and 529 guidelines allow you to reallocate the funds twice per year, so take the time to adjust the allocation to be more conservative.  Depending on the balance of the account and when you are planning to use the funds, 50% equities would be the most aggressive we would recommend 1 to 2 years before your child begins college.  Also remember that you won’t need to withdraw all funds immediately, assuming a significant balance is in the account, so your child’s time horizon for some of the assets is still 5 to 6 years away (junior and senior years).


 Can I use the 529 account to buy a computer for my child?

Understanding what expenses your 529 account can be used for is also helpful as you plan for the financial impact of sending your child to college.  Many of the expenses your upcoming college student will incur are “qualified” expenses, meaning you can withdraw funds from the 529 account to pay for those expenses without taxes and penalties.  In general, qualified 529 plan expenses include “costs required for enrollment or attendance at an eligible college or university”.  More specifically, this includes:

  • Tuition
  • Room and board, including off campus housing, provided the rent paid to a property owner is no more than the university’s published room and board rates. These rates can typically be found on the school’s website under “Total Cost of Attendance”.
  • Food expenses and meal plans. These types of expenses generally fall under the “board” category above. This includes groceries purchased if living off campus, but again within the limit of the “Total Cost of Attendance”.
  • Textbooks, including online textbooks, provided they are required reading for the courses taken.
  • Supplies and equipment

And yes, you can use 529 funds to pay for your child’s computer if the university or college requires it for their classes.  Other eligible expenses in this category include computer software and internet access and related services if used primarily by the student.  But no, you can’t use funds to pay for their cell phone!!


 Distribution of funds and payment of expenses

As you prepare to submit expenses to the 529 plan to cover your child’s college expenses, there are a few key items to make note of:

  • Qualified educational expenses incurred within a calendar year and in which you intend to be reimbursed must be submitted to the 529 plan within that same calendar year. You will receive a Form 1099-Q from each 529 plan you received a distribution from during the calendar year.  The amount of the gross distribution shown on each form will be divided between your earnings in the plan and your basis.  You should receive this form by January 31st of the following calendar year.  This gross distribution amount must match the amount of qualified expenses during the calendar year, or you will be subject to taxes and penalties on the excess distribution amount.
  • When your student incurs an expense, you can have the funds distributed directly to the institution or you can pay in advance and have the 529 plan reimburse you. For instance, if you receive a tuition bill for an upcoming semester, you can simply have the 529 plan funds sent directly to the university.  In the latter example, keeping good receipts for all expenses is a good practice.
  • If your college student receives a scholarship, don’t fret that you saved too much money in the 529 plan. You can withdraw funds from the plan up to the amount of the scholarship without incurring the 10% penalty typically applied to non-qualified withdrawals.  You will still have to pay taxes on the growth portion of the withdrawal, like you would on any investment, but the penalty is waived. Here are other exceptions to the 529 withdrawal penalty.


What happens if there are funds remaining in the 529 plan after my child graduates?

There are several answers to the question as noted below:

  • In many cases, you can simply rename the beneficiary. This is an ideal choice for people who have multiple children.
  • 529 plan funds can be used for graduate school as well. So, if your new college graduate is planning to continue their education, you have a perfect graduation gift for them.
  • Families and students can take tax-free 529 plan distributions for student loan repayment. The law allows an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary and $10,000 per each of the beneficiary’s siblings.
  • There is no time limit on when you must spend your 529 plan savings. This creates an opportunity for you to leave any unused funds as an educational legacy to your grandchildren.
  • If none of the above options are available, as a last resort, you can take a non-qualified distribution. The contributions you made to the plan will never be taxed or penalized as they were made with after-tax dollars.  But the earnings portion of a non-qualified distribution will be subject to income tax and a 10% penalty.

529 plans are the best savings vehicle when planning for future college expenses. Knowing the details and rules pertaining to how and when the funds can be distributed and used is important when planning for such expenses.

Written by

Mark F. Kleespies, CFP®

Mark joined THOR in January of 1997, and is the head of the Wealth Management team. His primary duties include working directly with clients and strategically planning the direction of the firm. Mark is a member of the Financial Planning Association and is a Certified Financial Planner.

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