The 529 savings plan is a great way to save money toward your child’s college tuition. But did you know you can do more with your 529 plan? Read this article to learn about the 529 plan’s tax benefits and how the account can help beyond tuition.

What a 529 Account Is

A 529 plan is a tax-advantaged account traditionally used to save for your child’s higher-education tuition. The federal government won’t tax account earnings, and withdrawals are tax-free when used for eligible expenses. Some states offer tax deductions, although our state of Florida doesn’t since we don’t have a state income tax.

The states administer 529 plans, and there are two types of 529 accounts. With the first type, the prepaid tuition plan, you buy credits at current prices for future tuition at a participating college or university.

The second type, the education savings plan, is an investment account that allows you to save for your beneficiary’s education costs at any eligible college or university—meaning you don’t have to know in advance where your kid will go.

We cover the savings plan in this article.

What You Can Do with a 529 Savings Plan

Your 529 plan beneficiary isn’t limited to college tuition. They can also use it for college expenses such as:

• Fees

• Books and supplies

• Room and board

• Computer technology and equipment

• Internet service

Your child can also use the 529 account to pay for an eligible vocational school, community college, graduate program, or apprenticeship. To find out if a program is eligible, contact the admissions office or use the U.S. Department of Education’s accreditation search.

You don’t have to wait until college to use the 529 plan. As of 2019, you can make plan distributions to pay for K-12 tuition and fees. You can withdraw up to $10,000 each year per beneficiary for public, private, or religious school expenses.

However, this may not be the best move if you live in a state like Florida, which doesn’t provide a tax deduction for 529 plan contributions. You might find greater value in allowing your 529 account earnings to compound over time for your beneficiary’s higher-education years. Talk to your financial advisor or tax professional to determine the right strategy for you.

Once your child has graduated from college, the 529 account can help them with debt payoff. Each beneficiary can use up to $10,000 for education loan payoff over their lifetime.

Finally, you can roll over the 529 plan balance into an ABLE account, which may serve your child better if they have a disability. ABLE stands for “Achieving a Better Life Experience,” and ABLE plans allow you to contribute money toward disability-related expenses, including education costs.

What happens if your child doesn’t go to college or if you have money left over after they graduate? A great feature of 529 plans is the ability to change beneficiaries. You can name a new beneficiary in your family if your original beneficiary doesn’t need the money—you can even name yourself!

You can also withdraw the money for non-education expenses, but you will be subject to federal income taxes and a 10% penalty on your earnings. (This Consumer Reports article covers instances where the penalty may be waived.) Your state might levy taxes/penalties as well.

Our Plantation, FL financial planning firm talks with clients about the potential tax impacts before cashing out their 529 plan. We recommend you speak with a financial advisor or tax professional before making a non-qualified withdrawal.

Final Thoughts

The 529 savings plan is a flexible way to help pay for your child’s education and related expenses. You can make withdrawals for a broad array of uses, including your child’s K-12 years. And given the federal government’s broad definition of family,  you can help other family members, including yourself, secure the education and training needed for lifetime success.

Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.