Happy August! If you have any kids or teenagers in your life, you’re acutely aware that the 2021-2022 school year has already started or is soon to begin which means that a qualified tuition program, or 529 plan, may be fresh on your mind. Whether you’re already contributing to the plan for private tuition or you’re gearing up to pay for college, North Georgia Tax Solutions is here to answer some of the most frequently asked questions about qualified tuition programs.
What is a 529 Plan?
With the first plan being established in 1986 by the Michigan Education Trust, QTPs are college and K-12 tuition savings plans that offer both tax and financial aid benefits. Contributions are made to the 529 plan so that a designated beneficiary can use the saved money for tuition and other education costs. This plan can be used at more than 6,000 U.S. colleges and universities as well as 400 foreign colleges.
Who Can Contribute to a 529 Plan?
Anyone can contribute to a qualified tuition program. Whether it’s your child, godchild, friend, or even yourself – you can contribute to a 529 plan to assist the future student in covering their expenses. Additionally, there is no age limit for beneficiaries. As long as the money is spent on qualified education expenses, the 529 plan can be put to use, and the beneficiary can receive all of the tax advantages that come with it.
What Happens if a 529 Isn’t Used?
You spend years saving for your child to go to college, and then they decide college isn’t for them. What next? Luckily, this plan can be used for other types of education including trade, vocational schools, and more. Another option is to shift the beneficiary from one family member to another – perhaps even yourself. It’s important to note that if you make a nonqualified withdrawal, it’s subject to both federal and state tax, plus the federal penalty of 10%.
When Should You Stop Contributing to a 529 Plan?
To maximize the advantages of the 529 plan, you want to estimate the expenses and contribute that amount. Any amount taken in excess of qualified expenses is considered taxable income, which is an undesirable result. It’s important to note that the tax deduction is only a state deduction. Earnings are not taxable at either a federal or state level if the QTP is used for qualified expenses. Ultimately, when you should stop contributing depends on how many students you have, the age of the student(s), what type of education, and where you think they are going to go to school.
Where to Start Your 529 Plan
When it comes to the 529 plan, there’s a lot of information to take in if you decide to start saving. Using this Find My State’s Plan tool, you can select your state and see all of the information you need regarding what plans are available, benefits, fees, and more. Among this information, you will see contact information for your state’s plan, so you can start the account as soon as possible.
Recent Changes to the 529 Plan
There have been some updates to the qualified tuition program within the last few years, with the first being that after 2018, you can withdraw up to $10,000 from your 529 plan for student loan debt without paying a tax penalty. Additionally, families can now pay up to $10,000 in tuition expenses for K-12 schooling.
Investing in the Future
This is an excellent opportunity to invest in a young person’s future whether it be your child, grandchild, niece, nephew, or a friend’s child. By starting early, you can make a difference in the life of someone who will one day be a young professional. With your assistance, they could be one step closer to starting their young adult lives as close to debt-free as possible.