Tuesday, May 22, 2012

10 Frequently Asked 529 Plan Questions

A crowd of college students at the 2007 Pittsb... (Photo credit: Wikipedia)We can usually find something to complain about when we discuss our taxes or the government. But when they do something right we should tell everyone about it. One of those things they did right was to establish 529 plans for college savings. The ability to save for college tax free is a great opportunity. It not only encourages you, it rewards you by not having to pay taxes on the growth.

I find that there is some confusion about how 529 plans work so I listed ten frequently asked questions:

What Is a 529 Plan?
529 college savings plan allows family members to save money for a child's education, invest that money and remove the income from their initial investment tax-free for educational expenses.

Do you need to have a child before starting a 529 Plan?
A 529 plan is a good investment option for anyone who wants to cover educational expenses, not just those with children. If you know that you want to have children or adopt, you can start a 529 at any time and the funds will be available to you when you finally do become a parent. If you don't want children or end up not having them due to life circumstances or health, you can use the funds you have in the plan for your own betterment and career advancement.

Can I have more than one 529 Plan?
Each 529 plan has both an owner, who is the one contributing to it and a beneficiary, who is the person who can withdraw the money for college expenses. There are no limits for how many times a child can be listed as the beneficiary on a 529 plan. For example, a child's parents and grandparents might each open a plan for that child. In addition, there is no limit for how many plans a beneficiary can open.

Can You Have 529 Plans for Both Kids or Just One Plan?
Having a separate 529 plan for each child allows you to devise a custom investment strategy for each child's financial needs. If one child is a newborn or toddler, you may invest more aggressively in a 529 plan, as you have more time to recover potential investment losses from higher-risk investments. If you have a child who's in middle school or high school, you may choose to move investments under that child's 529 plan to more conservative investments to minimize losses.

Can You Pay a Mortgage With a 529 Plan?
You cannot use withdrawals from a 529 plan for anything other than qualified high education expenses (QHEE). In general, the IRS lists QHEE as tuition and fees, supplies, such as textbooks, items necessary to do schoolwork, such as a laptop used primarily for education purposes, and room and board for students attending school at least half-time. Thus, you may not use 529 savings to pay for your mortgage.

What Are Qualified Expenses for 529 Plans?

Tuition and Expenses You may pay for tuition and expenses related to an eligible educational institution with money that you saved, and interest earned, in your 529 plan. The IRS defines an eligible educational institution as just about any accredited public, nonprofit and private post-secondary schools. Eligible expenses can include books, supplies or equipment necessary to enroll or attend the institution.
Technology As of 2009, computer technology is an expense that can to be paid from 529 plan funds. This was added to the list of eligible expenses under the American Recovery and Reinvestment Act of 2009. Computer technology includes any computer and related equipment such as a scanner or printer. This eligible expense does not include software or related devices used for entertainment or hobbies.
Special Needs Expenses If the person benefiting from the 529 plan has special needs or requires special services to attend school, those costs are eligible, according the the IRS. The special needs must be connected to being enrolled at an eligible educational institution. An example of an eligible expense would be the cost associated with making a room handicapped-accessible for a student living in a dorm, if the school has not already adequately done so.
Room and Board The IRS allows you to use the money saved and earned in a 529 plan to pay for room and board as long as the student is enrolled at least half-time. However, there are some limitations. The amount spent on room and board must be no greater than the amount determined by the institution as the allowance for room and board, or the actual amount charged for room and board by the institution for institution-owned housing. Otherwise, the expenses may not be eligible.

Can I Use a 529 Plan for High School?
As of 2011, the Internal Revenue Service does not let taxpayers use a 529 plan to pay costs for high school. You may only use contributions to a 529 plan to pay expenses at an eligible institution. In general, eligible institutions consist of any accredited vocational school, university or college. If you withdraw money from a 529 plan to pay for high school tuition, the IRS will charge a 10 percent penalty on the distributions, on top of whatever you pay in income tax.

How to Close a 529 College Plan
Contact the plan manager for the account. You will find contact information on account statements. Inform the plan manager’s customer representative that you want to close the account. At the end of the year, the plan manager will send you a 1099-Q form stating the earnings on the account. Fill-out the Internal Revenue Service (IRS) Form 5329 – Part II. File that form along with the 1099-Q form that you received from the plan manager with your other income tax reporting forms in the same year that you close the 529 account.

How Much Money Can You Put Into a 529 Plan?
A college savings 529 plan had a maximum contribution amount of more than $200,000 as of September 2010. Although no limit for a prepaid plan exists, you contribute funds into the account in a lump sum and installment format, based on the current age of the beneficiary and the number of years of college that you want to purchase.

How to Set Up a 529 Plan for Your Child
Contact your brokerage firm about your state's 529 savings plan. You do not have to use your state's 529 plan, however. Your broker will have information on the plans available through your state. Fill out an application. Fill out an application for a 529 plan with your broker if you plan on using him as your investment adviser. 

Contribute money to the plan. You may elect to have automatic contributions deposited into the plan's account. These contributions will come from your checking account. Choose investments in the plan that are appropriate for building a savings for your child. A 529 plan normally contains mutual funds. 

A Gift for Both Parent and Child.

Saving money for college with a 529 plan is not only a benefit for the future college student, it is also a plus for the parents who have a tax free way to invest funds for their child's education. You should coordinate these investments with your financial adviser to meet your child's future savings needs.
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