Clearing Up 529 Plan Confusion

Posted on: November 29th, 2016

As college costs continue to rise, many parents and grandparents are being proactive about setting aside money to help finance their child or grandchild’s education. One tax-advantaged vehicle for college savings is the 529 savings plan. While 529 plans are gaining popularity, a lot of confusion remains about what these savings plans can and cannot do. Here are answers to some of the most commonly asked questions regarding 529 plans.

  1. What happens if the child doesn’t attend college? Many parents and grandparents are concerned that their money will simply be lost if their child doesn’t ultimately attend college. While the 529 plan is intended for educational expenses, you can cash out your original contributions without penalty. If not used for education expenses, the earnings portion of your investment is subject to a 10 percent withdrawal penalty and ordinary income taxes. You can also change the beneficiary to another child or grandchild, or any child under the age of 18, with no penalties or tax consequences.
  2. Is money in a 529 plan considered a student asset? No, the money in the 529 plan is considered an asset of the parent or grandparent who owns the account. However, a portion of the parent’s assets are considered when determining your child’s expected family contribution. For grandparents, assets have no effect on the child’s financial aid determination.
  3. What are the rules for tax-free withdrawals? In order to qualify for tax-free treatment, withdrawals must be used for qualified educational expenses. While originally somewhat strict, these rules for educational uses have expanded in recent years. Among expenses that would qualify are:
    • Tuition and fees (can apply to any accredited college or university in the country)
    • Required textbooks
    • Computers and other equipment used for educational purposes
    • Room and board*
  1. What happens if I accidently use money for a nonqualified expense? In the event that a withdrawal is made for a nonqualifying expense, you’ll pay a 10% penalty and income taxes on any portion of the distribution that represents earnings on your original investment.

Answers to Your Questions

The investment professionals at Seaside National Bank & Trust are here to help you plan for your child or grandchild’s future. If you have questions or would like to set up a 529 plan for your child, contact us today.

* Room and board costs must be less than either the amount stated in the cost of attendance figures provided by the school for federal financial aid purposes, or the actual amount the educational institution charges for housing to qualify.

Investment  products:
Not federally insured
Not a deposit of this institution
May lose value