Financing Education 101

An investment in knowledge pays the best interest.” — Benjamin Franklin

Many parents grapple with the challenge of how to pay for James or Julia’s education, and for good reason. Have you looked into the cost of college lately? On average, attending a public in-state college costs $27,940 a year according to MoneyGuide Pro! That’s more than $110,000 for four years. Private colleges cost even more. Yikes!

Fortunately, a 529 college savings plan can really help. And the good news is, it’s not limited to just paying for college anymore. 529 distributions can also be used to pay for K-12 education, whether they’re private schools or parochial ones. These funds are versatile enough for various educational pursuits including two- and four-year colleges, trade schools, certificate programs, graduate programs, and even specific international institutions.

529 Plans – The Basics

While contributions to 529 plans don’t receive a federal tax deduction, the earnings within a 529 plan grow tax-free if they’re used for qualified educational expenses when you withdraw the funds. This tax-free growth can provide a significant benefit when saving for educational expenses.

Additionally, some states offer state income tax deductions or credits for contributions made to their own state’s 529 plans. Unfortunately, California residents don’t get this added state tax deduction. Check with your CPA to understand the tax laws in your state to understand if there’s any state tax benefits for your 529 plan contributions.

Beware: non-qualified distributions may incur income tax along with a 10% federal penalty tax.

529 Plans – Nuts & Bolts

It’s important to consider various factors before committing to a specific plan, including weighing the plan’s associated fees and expenses. Your ZRC wealth advisor can help you pick a 529 plan and guide you to get one set-up.

And, of course, it’s important to understand what qualifies as educational expenses that can be covered using 529 distributions. Here’s a list of qualified expenses and other important considerations:

  • Early Education: Distributions of up to $10,000 per student for K-12 tuition at public, private, and religious schools can qualify too.
  • Higher Education: Post-secondary students can use 529 funds for their college expenses and still qualify for federal student aid administered by the U.S. Department of Education.
  • Vocational & Trade School: Institutions must participate in federal student aid programs through the U.S. Department of Education to qualify.
  • Housing: 529 distributions can cover campus housing costs, including room and board fees. Off-campus housing rentals qualify up to the same cost as on-campus room and board.
  • Books and Supplies: Expenses for course-specific materials like textbooks qualify.
  • Needs and Services: Special needs equipment and services are eligible for 529 distributions. For example, students requiring mobility equipment may use 529 funds for these purchases.
  • Computers & Electronics: These can be qualified education expenses if they’re essential to the student’s study program.
  • Software: Can qualify if it’s used by the student and required for a specific class, such as technical engineering or design courses.
  • Internet: In certain situations, internet services can be paid for using 529 funds. It’s advisable to check with your Internet Service Provider (ISP) for more information.
  • Timing is Everything: Request funds during the same calendar year that they’re being spent to avoid having the distributions considered non-qualified.

What happens James or Julia don’t use the funds in the 529 Plan?

A 529 account can be valuable for education, but uncertainties arise if the beneficiary doesn’t use it for college or gets scholarships. Recent legislative changes provide a solution: from 2024, up to $35,000 from a 529 account can be converted to a Roth IRA for the beneficiary, thanks to the SECURE 2.0 Act passed in late 2022, which revamped the American retirement system. Additionally, it’s worth noting that 529 plans can often be reassigned to other family members, allowing for flexibility in utilizing the funds for education purposes within the family.

These are general guidelines; check with your educational institution and consult with your ZRC advisor for more information. Schedule a meeting with Barry, Kevin or Ryan to learn more!