Daily Archives: July 7, 2015

Planning for College? Benefits of a 529 Plan

by Kendall Tyson

Most parents and many grandparents often worry about the increasing college costs for their children and grandchildren.  According to a recent article in USA Today, college tuition and fees have increased 1,120% since 1978.  Edvisors reports 70% of students borrow to go to college and take on an average $33,000 in student loans.

One way to help plan for upcoming college costs is to open a 529 plan.  A 529 plan is a qualified tuition program operated by a state or educational institution designed to help set aside funds for future college costs.  Under IRC Section 529, a qualified tuition program is exempt from income tax.  The earnings grow tax-free, and as long as the contributions and earnings are used for qualified educational expenses then the beneficiary does not report or pay tax on any distributions.

Almost every state now offers a 529 plan and the plan’s fund can be used to meet costs of qualified colleges nationwide.  A North Carolina resident can invest in a Virginia plan for a beneficiary who attends a Tennessee college, as long as the college is an eligible institution.  (Eligible institutions have been assigned a federal school code by the Department of Education).

Anyone can contribute to a 529 plan; the plan just needs a beneficiary.  While the contributions are not deductible for federal tax, the contributor is not subject to AGI limitations and contributions are considered a completed gift, which is excluded from the contributor’s estates.  The IRS even allows for contributors can elect to take contributions larger than the annual gift exclusion into account ratably over five years.

All distributions from the 529 plan must be used for qualified higher education expenses.  Qualified higher education expenses include the following:

  • Tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution;
  • Expenses for special needs services incurred in connection with enrollment or attendance
  • Room and board included for students who are at least half-time
  • Internet access or related services used by the beneficiary while enrolled at an eligible educational institution

Distributions from the plan will be reported a Form 1099-Q, Payments from Qualified Education Programs, showing the earnings and basis related to the distribution.  Any distributions not used for qualified expenses are included in income and subject to a 10% penalty.  Many individuals confuse the idea of using 529 funds to repay student loans.  Unfortunately, the repayment of prior year student loans does not meet the IRS definition of “qualified education expenses”.  Any distributions used to repay student loans are included in income and subject to the 10% penalty.

529 plans can also be rolled into another qualified tuition program for the same beneficiary or transferred to another beneficiary within the same family with no adverse tax consequences.

With the proper planning, a 529 plan can help ease the burden of increasing college costs with relatively low maintenance for the contributor.  For more information or help in finding a 529 manager or financial adviser, please contact our office.

Kendall Tyson ([email protected]), a Tax Manager at Langdon & Company LLP.  She specializes in physician/dentist practices, multi-state and nonprofit returns.