The good news is that a 529 plan is not just for college expenses. If the money is withdrawn before age 59 without qualifying for an exception, there may be taxes and penalties due. For many people, the advantages, including favorable tax treatment, will outweigh any downside, including potential penalties for early withdrawals or for using the money in a way that is not approved. Even if you don't use the funds for your son's education, you have other alternatives. In addition to state income tax benefits, some grandparents may also use 529 plans as an estate planning tool. You get to contribute to it and get the exact same benefits as you would if it was for a child. By Kaitlin Pitsker Unfortunately, that does not mean these are tax-free withdrawals. 529 plans are a great way to save for college, but its important to be aware of the possible consequences if the beneficiary doesnt end up going to college. While originally conceived as a way to save for college, 529 plan funds can now go to a wider array of programs and institutions, including public and private colleges and universities, graduate schools and trade schools, and even elementary or secondary school (for K-12 education, only $10,000 a year can be withdrawn and only for tuition). Age-based funds make sense for some retirement savers, but they rarely make sense for college savers, in my opinion. What this can mean is your states plan may be the best for you. So, just as I mentioned in the section above, the answer is yes you can continue to the plan account after your child goes to college. The 529 college savings account belongs to the account owner, normally the parents or guardian. Any distributions made from parent-owned 529 accounts for dependent children are not counted as income against financial aid. UGMA & UTMA accounts | Tips for custodial accounts | Fidelity The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries. If the money is used for anything outside of the qualified education . 529 Plans Or, perhaps another pandemic hits and your income has dropped, or stopped. Download the Schwab app from iTunesClose. Finally, not tied to any state is the nonprofit Tuition Plan Consortiums Private College 529 Plan (opens in new tab) that allows you to prepay for hundreds of private colleges across the country. Or yourself. By Chris Gullotti, CFP (Video), Q: What Are The Top 7 Benefits Of 529 Plans? You can evencontinue contributing after they graduate. The 529 account can also be transferred to a different states plan, but there may be some penalties for doing so. By Kaitlin Pitsker However, there are some important things to know about withdrawing money from a 529 plan. And of those, eight required plan beneficiaries to be residents of the states that offered them. However, she can establish her own account by naming herself as account owner and beneficiary. With new changes to the FAFSA process, you can superfund their college savings without affecting their financial aid status. Also, if the beneficiary dies or becomes disabled, the plan can be used to pay for related expenses. Withdrawals used to pay for qualified education expenses such as college tuition, room and board, fees, books, supplies and equipment required for courses are generally tax-free. I need to be able to manage it for her. If these amounts are just too low for you, you might find some relief in the fact that these are limits per child or beneficiary. 529 plans are a popular way to save for college, but can the money be used for rent? The funds can be used to pay for education expenses over a period of time. You can transfer that 529 money to a new beneficiary (a younger sibling or a stepchild, for example) causing your goal to be reached. If the account is transferred to another beneficiary, the new beneficiary must use the account for qualified education expenses within ten years of receiving the account. After age 18, $100,000 a year is to pay for college until the 529 plan goes to 0 at age 25. Those 529 assets can be used for a variety of education costs. There are lots of ways kids can continue their education post high school, and a 529 is there to help them. In some cases, the rent may be considered an expense related to the students education if it is for a studio or other type of housing that is not provided by the school. If the rent is for a students dorm room or apartment, the 529 plan can be used to pay for it. Where once the Coverdell had the advantage of allowing qualified withdrawals for K-12. What do you do with the balance? Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program. Grandparents may still qualify for state income tax benefits regardless of who owns the 529 plan account. I had a Uniform Transfer to Minors Act, or UTMA, account for my daughter. In fact, over 50 years those in the highest tax bracket would earn 23% more at a 4% annual return and 122% more at an 8% annual return rate in a tax-deferred CSA than in an equivalent taxable account. To be eligible for this tax treatment, withdrawals have to be for qualified educational expenses (well get into more detail of what those are.). By funneling the remaining college tuition through a 529 plan and claiming a state income tax deduction or tax credit each year, parents essentially get the equivalent of anannual discount on college costsat their marginal tax rate. 529 plan age limits With a Coverdell Education Savings Account (ESA), parents must stop making contributions once the beneficiary turns age 18. There are a few exceptions to the 30-year rule. UTMA Accounts Explained: Rules, Custodial Brokerages and More If You Child Does Not Attend Or Drops-Out Of College. Are you looking for a midlife career change? For any scholarships that were received, an equal amount can be withdrawn penalty free. One is to use the money for educational expenses that are not eligible for a tax deduction, such as room and board. In Colorado, New Mexico, South Carolina and West Virginia contributions to a 529 plan are fully deductible in computing state income taxes. You are probably right. Its important to remember that 529 savings plans are an investment, and require judgment on risk versus return. Keep these tips in mind when withdrawing money from a 529 plan, and be sure to consult a tax advisor if you have any questions. Parents should continue to make 529 plan contributions until they are finished paying for the childs college education. This will require making investing decisions: What is your risk tolerance? I have just one more bonus tip for you: before you sign up for a 529, make sure you do your research to find the best option for you. (Video), Q: Does a 529 plan affect financial aid? But Tracy Green, a planning and life-events specialist at Wells. Still, you shouldnt let the potential penalty discourage you: Even if your child doesnt attend college or drops out you have options. Are there other options for using this money? 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