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Writer's picture Treavor Dodsworth CFP®, CPA, CKA®

#92 - To 529 or Not 529 - Part 2


To 529 or Not 529 - Part 2

In the last post, we discussed how you could use the variables specific to your situation (like tax percentage) to determine whether a 529 is beneficial or not. For example, you may use the variables to determine if there is at least a 50% probability that you use the money for qualified expenses a 529 should be considered. That begs the question, "What is a qualified expense?" Many people only think of college-related expenses. While many of these expenses do qualify, there are many other ways the 529 money could be used that may not require penalty and/or tax to be paid.

  1. A 529 beneficiary is not a permanent decision. For example, if your child does not end up using the 529 for qualified expenses, the beneficiary can be changed to many other individuals. In many situations, this is a tax and penalty-free change.

  2. A 529 can be distributed penalty-free to the extent of certain tax-free scholarships that are received. You may still have to pay ordinary income tax on the earnings portion of the distribution.

  3. A 529 can be used for certain student loans with a lifetime limit of $10,000. In some situations, this may reduce the student loan interest tax deduction.

  4. A 529 up to $10,000 per year can be used for certain K-12 education expenses.

Each state may not follow the same rules as the federal government. Therefore you need to review applicable state law as well. For example, in Indiana, while appropriately using the 529 for student loans, you may still have to pay back any state tax credit you received for contributions to the CollegeChoice 529 Education Savings Plan.


Given the overall flexibility of 529s (namely that the beneficiary can be changed), one should not just consider whether their child will use the 529 on college when considering whether to use the 529 as a savings vehicle.

 

Interesting Article(s) or Video(s)

  • The article discusses a variety of expenses and whether or not they would be considered qualified expenses.

 

Thank you for reading!

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