Parents who open a college 529 plan (named for its IRS code number) for their child’s future education can get tax-free earnings. This, in turn, can lead to borrowing less in federal and private student loans.
Contributing to a 529 plan is quite straightforward — just open an account, name your beneficiary and start depositing at will.
Tapping into it, however, isn’t quite as simple as withdrawing money from a checking account to reimburse your tuition bill. You’ll need to avoid state-specific rules and other fees that weaken your earnings, and ultimately, affect your ability to make the most out of a college 529 plan.
How well do you know your 529 college savings plan?
Don’t forget some of these specifics if you’re looking to maximize your 529 savings plan returns.
1. There is more than 1 type of 529 plan
A prepaid tuition plan allows savers to purchase units on a credit-based system to put toward tuition and fees — but not secondary expenses such as room and board — once it’s time to start living on campus.
Prepaid plans allow you to lock in today’s tuition prices at eligible colleges and universities. If a tight family budget and the amount of student loans you may borrow are priorities, this plan is likely a better fit than the standard 529 college savings plan. Always check to see which universities participate so your dollars will count.
There’s also the more well-known college savings plan where your money can be invested in a variety of ways and compound interest over time. Withdrawing funds from your 529 college savings plan is easy: Generally, you can have a check made payable to either the account holder, beneficiary or school. (However, consult with the college or university since some schools may differ.)
2. Evaluate the best 529 plans by state
Prepaid or standard, 529 plans are established and sponsored by states. But they may differ depending on where you live. More than 30 states offer tax deductions and breaks on 529 plans, though several don’t, so confirm this before you begin investing. Residents of six states — Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania — are lucky enough to be able to invest in any state’s 529 plan and get full tax benefits.
Prepaid plans stop short of covering academic costs beyond tuition and fees, so always check first to ensure your other savings will be enough to take care of out-of-pocket costs before pursuing student loans. When choosing the best 529 plan, research plans outside your home state’s offering for a fair comparison.
3. Not all 529 college savings plan distributions are created equal
The money you invest in a 529 plan will grow without being federally taxed. But not every 529 withdrawal is eligible for a tax break. For instance, tax-deducted 529 proceeds can’t be used toward education-related tax credits on your tax return, like the American Opportunity Tax Credit or the Lifetime Learning Credit. Likewise, you won’t be able to claim deductions on tuition and school fees if you used tax-free 529 money to pay for them.
529 proceeds also don’t cover certain unqualified college expenses, like transportation — even if it’s an airline ticket to and from campus between semesters. Off-campus commuter students may even have difficulty using 529 money to pay for room and board. To confirm what your 529 proceeds may cover, contact the plan manager and the school and verify what is and isn’t covered. Tuition, books and supplies should be covered universally. Devise a withdrawal plan to make sure your investment is maximized.
4. Watch out for penalty fees
College 529 plans are a lot like individual retirement accounts (IRAs): Withdraw your earnings too soon and you may incur a penalty fee. Specifically, if you take out any dollars before the account beneficiary incurs any qualifying expenses (before your tuition bill is due) or for any non-qualifying expense (such as a medical bill), a 10% penalty can be imposed.
There are some exceptions to withdrawing money early for non-qualifying expenses, including if an account’s beneficiary becomes disabled, dies or receives a scholarship or another type of educational assistance.
Through the House Ways and Means Committee’s Secure Act, however, you may also be able to use a 529 distribution to repay up to $10,000 of your (or a sibling’s) student loan debt. The pending legislation was passed in the House and was awaiting Senate confirmation as of the end of May 2019.
5. Other fees may apply, too
Several fees and ancillary expenses may apply to your 529 savings plan. On a prepaid plan, you’ll likely have to pay enrollment and administrative fees upon withdrawal of funds. College savings plans charge the same, often with the inclusion of an asset management fee, which may depend on the type of investment you have in place.
However, depending on the 529 plan in your state, you might be able to get some of these fees waived if you carry a large account balance or have an automatic deposit plan set up.
6. Don’t withdraw from the wrong 529 account
If you’ve got more than one 529 plan, you’re making a mistake if you withdraw randomly from any account — even the one with the highest balance.
Check your investments and see which ones have the best investment growth rates. Tap into those savings to receive the best tax breaks. Like any investment, gauging a plan’s growth potential ensures that you’ll be earning enough money to contribute aggressively toward college tuition.
7. Don’t pass on 529-based credit card rewards
For 529 donors with excellent credit, consider opening a credit card designed to complement your 529 plan. Some of them will give cash back or other rewards points that can be used toward your investment. These cards include:
- CollegeCounts 529 Rewards Visa® Card (Alabama)
- Bright Directions 529 Rewards Visa® Card (Illinois)
- Upromise® Mastercard®
Some of these cards may not offer the same cashback or rewards percentages and also may not align with 529 plans in certain states, so make sure to read the fine print before applying.
8. Pay careful attention to withdrawal timing
529 withdrawals won’t always qualify for a tax break if you don’t use them for qualifying educational expenses within the same tax year, so make sure your timing is right. Experts recommend keeping detailed records — not only for the IRS, but your own financial activity — since a withdrawal made at the wrong time could compromise reimbursing your expenses.
Remember that there are three ways to withdraw money from a 529 college savings plan:
- Distributing the money to the account holder
- Distributing to the beneficiary (most likely the student)
- Distributing to the school
In this case, itemize and document every single tuition, school supply or related expense in the school year so that your 529 contributions are maximized to their fullest potential.
Also keep in mind that a beneficiary could receive no more than $15,000 in a given year before the IRS could impose a gift tax. Before making a withdrawal beyond that amount, you might ask a financial professional or tax professional about the repercussions.
No two 529 plans are alike, so you should manage yours uniquely. Invest and maintain your account according to the schools you’re considering, what the tuition may be and by locking into the best investments and interest rates available at the time you open.
Don’t sit idle. Monitor your investments and see how they grow over the years. If college is years ahead for you, a child or grandchild, it gives plenty of time to cultivate your 529 college savings plan and watch your money grow into something to keep college affordable.
Andrew Pentis contributed to this article.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.36% APR (with Auto Pay) to 7.82% APR (with Auto Pay). Variable rate loan rates range from 2.41% APR (with Auto Pay) to 6.99% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for SoFi.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.45% effective May 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.41% – 6.99%1||Undergrad & Graduate|
|2.41% – 7.89%2||Undergrad & Graduate|
|2.43% – 6.65%3||Undergrad & Graduate|
|2.38% – 6.81%4||Undergrad & Graduate|
|2.41% – 8.19%5||Undergrad & Graduate|
|2.60% – 9.60%6||Undergrad & Graduate|