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When Can You Use a 529 College Savings Account?

Menashe Morley Group

When Can You Use a 529 College Savings Account?

Posted on November 10, 2017

Millions of Americans use 529 college savings accounts to sock away money for their kids’ and grandkids’ education. They are popular, in part, because of the tax benefits they can provide: withdrawals, including any earnings, are not taxed by the IRS when they are used for qualified college expenses.

Besides tuition and fees — the biggest educational bills you will probably face — other eligible expenses include such things as room, board, books, required supplies, the purchase of computer and peripheral equipment, computer software, or Internet access and related services, and certain expenses in the case of a special-needs beneficiary, as defined by the Internal Revenue Code.

But there are limits to what sorts of expenses are allowed. Using 529 funds to pay for a music degree at an accredited institution for your daughter would be fine, but if you use them to pay for private piano lessons, you will be penalized. That penalty essentially means you have to pay income tax on the earnings portion of the money you withdrew, as well as a 10% additional federal tax. However, you will never pay income tax or the additional federal tax on the principal portion of your withdrawal, regardless of what it is used for.

The rules are fairly flexible when it comes to how many students can benefit from your 529 account. Suppose you set aside $200,000 in an account for your daughter and you spend only half of the money. You could transfer the rest to an account for another family member of the beneficiary, for example, your son or even a niece or nephew. If there is something left over, it can stay in the account indefinitely — and be ready, decades later, to help pay the cost of a grandchild’s education. Or it could even be used to fund your own or your spouse’s continuing education.

If you want to set aside money for lessons or other educational activities that a 529 account does not cover, you could consider a trust or a custodial account under the Uniform Gifts/Transfer to Minors Act (UGMA/UTMA). However, there are potential drawbacks to that strategy. These gifts cannot be taken back and do not allow you to transfer assets between beneficiaries. And once the child you designate as beneficiary reaches a certain age—which varies by state—he or she will be free to spend the money for purposes other than education. If that is a concern, you may decide you are better off using a typical savings or investment account to earmark money for educational goals that a 529 account does not cover. Working together with your outside tax and legal specialists, your financial advisor can help you figure out what makes the most sense for your family.

For more information, contact The Menashe Morley Group in the Rancho Santa Fe office 858-381-8113. The Menashe Morley Group, serving the community for over 32 years: David Menashe is a Senior Vice President and Wealth Management Advisor, Bruce Morley CRPC ® is a First Vice President and Wealth Management Advisor and John Naviaux CPWA ® is a Vice President and Wealth Management Advisor. Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and other subsidiaries of Bank of America Corporation. Investment products: Are Not FDIC Insured, Are Not Bank Guaranteed, and May Lose Value. MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of Bank of America Corporation. Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. © 2017 Bank of America Corporation. All rights reserved. ARTRBXVD

Menashe Morley Group
Menashe Morley Group

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