Posted by Unifirst Financials & Tax Advisors

Five Rules to Help Maximize 529 Plans to Repay College Funds

Five Rules to Help Maximize 529 Plans to Repay College Funds

If you need a good plan to save money on your kid's education, a 529 plan is a good option. Since the tuition fee seems to be rising every year, it is essential to make alternative financial plans.

529 plans, being state-sponsored, allows you to use after-tax contributions to increase your earning. Different states offer the plans, and you can join any that appeals to you. These plans, however, differ in various state as there could be exclusive benefits or extra tax breaks

529 funds are meant for qualified expenses like textbooks, tuition fees, etc. While 529 plans can help ease your college tuition burden, it is essential to follow the rules. Here are some of the regulations guiding 529 plans

Involve Extended Family 

It is generally known that parents, guardians, and students are responsible for footing their college funds. The 529 plans allow for extended family also to take part. Relative can either contribute to the 529 accounts or open one.

As a grandparent, for an instant, you might contribute to the plan and even take a deduction on your state's tax if your state offers one. Some states allow you to claim a deduction without being the owner. This could be different in other states hence, be sure you know the rules guiding your state

Pay the School Directly 

Setting the 529 plan to pay the school directly is an excellent way to avoid issues and remove yourself from the process. This helps you avoid minor issues like excess withdrawals, which offer peace of mind. Withdrawing too much might result in a tax liability.

With a 529 plan, you can have a direct payment process and give yourself peace of mind.

Get Familiar With Your State’s 529 Rules

Each state has its unique 529 rules; hence it is essential to know them. This helps you understand the pros and cons of the state you are using. There are various restrictions on 529 plans offered by different states, and it’s your responsibility to know what these are. 

It is also essential to claim any available income tax deduction. This also varies from state to state and might be deductions. Some states do not give tax breaks at all while others do. Know the rules.

Another Child Will Use it if One Child Doesn’t 

There are times the specified kid could decide not to go to college, and parents worry that their money in a 529 plan is gone. There are could also be fear that the child might not use the whole amount. Many parents also worry that they will lose the entire amount kept in the account.

The good news is that you can change the beneficiary to another sibling or anyone provided the person is related. You can also withdraw the money, although there will be a penalty and income tax on the earnings if you couldn't get another person to be a beneficiary. This is different from losing the entire funds in the account.

Closely Watch the Rules 

With a 529 plan, you get to withdraw money for qualified expenses. These expenses are neither subjected to tax nor any form of penalty. You, however, need to know what is qualified as excess withdrawal in a year could set you up for sanction in the form of penalty or taxes.

According to Lawrence Sprung, you should not withdraw more than the actual expense you incur in a year. For instance, Jessica is to pay an annual tuition of $50,000. You might want to take the whole amount from your 529 plan at the beginning of the year. This will cause a problem.

If the first semester commences in July, you will only incur the $25,000 in the current year. Withdrawing the entire $50,000 is not advisable as the extra $25,000 might become taxable. 

Yes, we understand that this is a small thing; you need to avoid financial errors that might affect the funds of your kids.

Concluding Remarks

Without a doubt, the 529 plan can be a lifesaver for parents who want their kids to go through college easily. The downside, however, is that the rules could be challenging to navigate. However, the best and most useful advice are the simplest. Follow our rules, and you will not miss it.


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