If you are worried about being able to afford college costs for your children or teens, a 529 education plan might be one way to boost your savings. These plans allow you to save and invest for college while perhaps enjoying tax advantages now and later. Here are a few of the key benefits of a 529 savings account, how you may use one, and what effect it may have on the financial aid your child might receive.
What Are Qualified Expenses Under a 529 Plan?
Generally, you may withdraw 529 funds without paying federal tax, including capital gains, as long as you pay for qualified educational expenses.1
You may also have a deduction for state taxes or no state tax liability depending on where you live or your investment in a particular state’s 529 plan. All states and the District of Columbia offer at least one plan.1 You do not have to be a resident of a state to invest in the state’s 529 savings program.
Qualified expenses include:
- Cost of attendance at a public or private college or university, including tuition, books, fees, equipment, and an amount estimated by the school for annual expenses to pay for room and board
- Cost of any certified apprenticeship programs, including books, fees, equipment, and supplies
- Repayment of up to $10,000 of student loans
- Payment of tuition expenses for students in kindergarten through 12th grade, up to $10,000 per year
As long as a withdrawal pays qualified expenses in the same year the withdrawal occurred, it should be free from federal tax liability.
How Do 529 Plans Affect Financial Aid Offers?
If your child is heading to college soon, you may already know that the Free Application for Federal Student Aid (FAFSA) determines the expected family contribution (EFC). A student and their family must put this amount toward the student’s educational expenses each year. The calculation of the EFC uses the parent’s income and assets, not the student’s, which is important when it comes to 529 plans.
If the student is the owner of the plan and is not a dependent, the value of the plan is not on the FAFSA. However, if the parents are the plan owners–or the student is a dependent and the plan’s owner–the 529 plan is an asset used for the EFC calculation.
If grandparents own the 529 account, it is not an asset on the FAFSA. However, any withdrawals from the grandparent’s 529 account are income for the student and are included on the following year’s FAFSA.
If your child gets a scholarship or your EFC is relatively low despite parental ownership of a 529 account, it may not make much of a difference who owns the 529 account. However, for families with significant 529 assets or grandparent-held 529 accounts, it might be worth talking to a financial professional about handling the account ownership for FAFSA purposes.
Because each family’s income and circumstances are different, there is no one-size-fits-all answer. Making your 529 account as tax-efficient as possible may save you significant money over your child’s college years.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional and tax advisor prior to investing.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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