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Q. What is a 529 plan?
A. A plan operated by a state or educational institutionwith tax advantages and potentially other incentives to make it easier to save for college and other post-secondary trainingor for tuition in connection with enrollment or attendance at an elementary or secondary publicprivateor religious school for a designated beneficiarysuch as a child or grandchild.
Q. What is the main advantage of a typical 529 plan?
A. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiarysuch as tuitionfeesbooksas well as room and board at an eligible education institution and tuition at elementary or secondary schools. Contributions to a 529 planhoweverare not deductible.
Q. Can I make withdrawals from my 529 plan for tuition at elementary or secondary schools?
A. Yes. As of 2018the term “qualified higher education expense” includes up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary publicprivateor religious school.
Q. Can I make withdrawals from my 529 plan for the costs of computer technology or equipment?
A. A qualifiednontaxable distribution from a 529 plan includes the cost of the purchase of any computer technologyrelated equipment and/or related services such as Internet access. The technologyequipment or services qualify if they are used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.
Q. What does “computer technology or equipment” mean?
A. This means any computer and related peripheral equipment. Related peripheral equipment is defined as any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computersuch as a printer. This does not include equipment of a kind used primarily for amusement or entertainment. “Computer technology” also includes computer software used for educational purposes.
Q. Is this “cost of the purchase of any computer technology or equipment or Internet access and related services” available for any other education benefit under the tax laws?
A. Noit is only for 529 plan withdrawals. Such costs are generally not qualifying expenses for the American opportunity creditHope creditlifetime learning credit or the tuition and fees deduction.
Q. How long have 529 plans been around?
A. Congress created them in 1996 and they are named after section 529 of the Internal Revenue code. “Qualified tuition program” is the legal name.
Q. Can anyone set up a 529 plan?
A. Yes. You can set one up and name anyone as a beneficiary — a relativea friendeven yourself. There are no income restrictions on on either youas the contributoror the beneficiary. There is also no limit to the number of plans you set up.
Q. Are there contribution limits?
A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 planhoweverbe aware that there may be gift tax consequences if your contributionsplus any other giftsto a particular beneficiary exceed $19,000 during the year. For information on a special rule that applies to contributions to 529 planssee the instructions for Form 709 PDFUnited States Gift (and Generation-Skipping Transfer) Tax Return.
Q. Are there different types of 529 plans?
A. There are two basic types: prepaid tuition plans and savings plans. And each state has its own plan. Each is somewhat unique. States are permitted to offer both types. A qualified education institution can only offer a prepaid tuition type 529 plan.
Q. Am I restricted to my own state’s 529 plan?
A. No. Your state’s 529 plan may offer incentives to win your business. But the market is competitive and you may find another plan you like more. Be sure to compare the various features of different plans.
Q. Who controls the funds in a 529 plan?
A. Whoever purchases the 529 plan is the custodian and controls the funds until they are withdrawn.
Q. Each 529 plan account has one designated beneficiary. What does that mean?
A. A designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. The beneficiary is generally not limited to attending schools in the state that sponsors their 529 plan. But to be surecheck with a plan before setting up an account.
Q. Can I change the beneficiary of a 529 plan I have set up?
A. Yes. There are no tax consequences if you change the designated beneficiary to another member of the family. Alsoany funds distributed from a 529 plan are not taxable if rolled over to another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family. Sofor exampleyou can roll funds from the 529 for one of your children into a sibling’s plan without penalty.
Q. What is an eligible educational institution?
A. An eligible educational institution is generally any collegeuniversityvocational schoolor other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. Note thatbeginning in 2018the term “qualified higher education expense” includes expenses for tuition in connection with enrollment or attendance at an elementary or secondary publicprivateor religious school.
Q. I have not set up a 529 plan for my child. Can I start one now and take advantage of this new computer benefit?
Answer: You can start one anytime. But the benefit of a 529 plan comes with the tax-free withdrawal of earnings that build up in the plan based on the contributions made. Like other types of savings accountsearnings are usually a function of time. A 529 plan which is set up while the student is already enrolled in college or in other postsecondary education may not accrue enough earnings to be of immediate benefit. Howeverthat doesn’t mean that such a student wouldn’t benefit from a 529 plan as his or her postsecondary education continues.
Q. Where can I find more information about 529 plans?
A. A good source is IRS Publication 970 PDFTax Benefits for Education.
Q. Is setting up a 529 plan for my child right for me?
A. Only you can figure that out. 529 plans are not for everyoneand are also not the only option available for paying for college. Setting up a 529 plan is an investment decisionwhich means both the benefits and drawbacks must be consideredalong with alternative ways of accomplishing the same thing. There are many independent sources of information on 529 plans. Alsoyou may want to consider consulting a trusted tax professional or financial planner.