Help for Rising College Costs
With more eligible expenses and greater flexibility, 529 college savings plans work harder for you
MILLIONS OF AMERICANS USE 529 college savings plans to sock away money for their kids’ and grandkids’ education. They’re popular, in part, because of the tax benefits they can provide: withdrawals, including any earnings, aren’t taxed by the IRS when they’re used for qualified college expenses. (For details, see IRS Publication 970.*) Beginning in 2015, the IRS adopted several rule changes that give savers more flexibility in how their 529 accounts can be used, according to Richard Polimeni, director of Education Savings Programs at Bank of America. Here’s a quick rundown of what’s changed:
✔️ Tech gets a free pass. Computer equipment and services, including software purchases and Internet access, qualify as allowable education expenses. Under the old rules, withdrawals to cover tech purchases were considered eligible only if the school required them.
✔️ You can redeposit tuition refunds. Say you get a tuition refund after dropping a class. Now that refund can be reinvested in the 529 account from which it was originally withdrawn without paying a tax penalty, as long as it’s redeposited within 60 days of the date it was issued. Under the old rules, unless there were other eligible expenses the refund amount could be applied to, the IRS would have considered it taxable income.
✔️ Potential penalties have eased. Previously, if someone with multiple 529 accounts withdrew funds from one of them to pay for an expense the IRS considered unqualified, a penalty would be charged, based on a percentage of the earnings held in all accounts. Under the new rules, penalties are assessed only against the account from which the funds are drawn—which could mean a lower penalty for you.
“Because of their generous tax benefits and flexibility, 529 plans have always been a great way to invest for higher education,” says Polimeni. “With the federal rule changes, they are that much more attractive.”
MILLIONS OF AMERICANS USE 529 college savings plans to sock away money for their kids’ and grandkids’ education. They’re popular, in part, because of the tax benefits they can provide: withdrawals, including any earnings, aren’t taxed by the IRS when they’re used for qualified college expenses. (For details, see IRS Publication 970.*) Beginning in 2015, the IRS adopted several rule changes that give savers more flexibility in how their 529 accounts can be used, according to Richard Polimeni, director of Education Savings Programs at Bank of America. Here’s a quick rundown of what’s changed:
✔️ Tech gets a free pass. Computer equipment and services, including software purchases and Internet access, qualify as allowable education expenses. Under the old rules, withdrawals to cover tech purchases were considered eligible only if the school required them.
✔️ You can redeposit tuition refunds. Say you get a tuition refund after dropping a class. Now that refund can be reinvested in the 529 account from which it was originally withdrawn without paying a tax penalty, as long as it’s redeposited within 60 days of the date it was issued. Under the old rules, unless there were other eligible expenses the refund amount could be applied to, the IRS would have considered it taxable income.
✔️ Potential penalties have eased. Previously, if someone with multiple 529 accounts withdrew funds from one of them to pay for an expense the IRS considered unqualified, a penalty would be charged, based on a percentage of the earnings held in all accounts. Under the new rules, penalties are assessed only against the account from which the funds are drawn—which could mean a lower penalty for you.
“Because of their generous tax benefits and flexibility, 529 plans have always been a great way to invest for higher education,” says Polimeni. “With the federal rule changes, they are that much more attractive.”
