Important 529 Plan Reminders For 2020 And Beyond

Forbes - April 14, 2020


Higher education may never look the same after COVID-19 runs its course. After all, nearly all colleges and universities have shuttered in-person classes for the remainder of the year, with many hobbling along with online learning plans that weren’t exactly designed for the coursework.


Some schools are even opting for pass-fail grading for the academic year, both as a way to help students achieve their educational goals but also to make sure nobody has to retake courses they are struggling with due to the pandemic.


Students trying to choose a college by May 1st can’t even visit college campuses to get a feel for each school, and many schools are (or will be) required to give cash refunds for room and board fees students weren’t able to benefit from. The list goes on and on.


That’s why now is an excellent time to think over your college savings 529 plan strategy if you have a child approaching college or one already in school. Here are some important reminders to mull over during the month of April and beyond:


Refund On The Way? Put It Back Into The 529 Account


According to financial advisor Cecile Hult of Argent Bridge Advisors, you need to take steps now to avoid a penalty if you find yourself getting a refund for college room and board expenses you originally paid for with 529 money.


Specifically, if you took a distribution from a 529 this year to pay for college expenses and you get a refund from your school, you need to put the amount of the refund back into the 529 account within 60 days.


Failure to recontribute funds within 60 days could mean that your distribution was not for qualified expenses, which also means a 10% penalty plus capital gain taxes, noted the advisor.


Hult says it’s possible the Internal Revenue Service (IRS) might rule differently on this topic by the end of the year based on unprecedented circumstances, but that’s the rule for now and you should follow it to avoid the financial penalty.


Conversely, however, financial advisor Alex Caswell of RHS Financial says you can also use the money for eligible higher education expenses you have coming up right away. This might include college textbooks, computer equipment, or prepaid dormitory costs for next year.


While the IRS does not keep tabs on what you use the check for, it is important to keep good records anyway. Caswell says that you won’t get penalized for the tuition reimbursement, but the IRS could catch on and slap you with a penalty if you don’t do the right thing.


Yes, 529 Accounts Can Be Used For Online School


Mayssoun Bydon, founder and managing partner of IHL Test Prep and Admissions, says it’s important to remember that, yes, 529 funds can be used to pay for online education at eligible institutions of higher learning. The key to making sure you can use 529 plan money for your school is checking to see what it takes to qualify as an eligible institution.


The United States Department of Education has a tool that lets you check schools to see if they’re eligible for 529 plans. Generally speaking, eligible schools include most accredited public, nonprofit, and privately-owned–for-profit postsecondary institutions.


While it’s possible you or your dependent were thrown into online learning without any choice in the matter this year, the fact 529 funds are good for online learning is worth considering as you consider college options moving forward.


You Can Use A 529 Plan For K-12 Education


If you have extra 529 plan funds you aren’t sure you’ll use, or if you could contribute more now and you have kids in private school, Bydon says it is important to understand how the Tax Cuts and Jobs Act of 2017 expanded the allowable uses of these accounts to include up to $10,000 in annual private K–12 tuition expenses.


However, you should check with a qualified accountant before using funds for K-12 education, notes Bydon. “Some states have been slow to adopt this change, so withdrawals may be subject to state taxes in certain states.”


You Can Use 529 Plan Funds To Pay Student Loan Debt


Due to the passage of the Setting Every Community Up for Retirement (SECURE) Act that was signed into law on December 20, 2019, families with 529 college savings plans can use up to $10,000 in 529 savings per student, per lifetime for qualified higher education loans.

There are some “gotchas” to be aware of with this move, however, including the fact some states may be slow to adopt the change enacted by federal law and may not count the money you deduct as a qualified higher education expense.


However, if you combine this with the current “pause” on student loans, it could help you use pre-tax money to eliminate a good amount of debt.


Don’t Stop Your 529 Plan Contributions For Younger Children


While any time is a good time to save for college, now is a smart time to put money into a college 529 savings plan that has underlying investments in the stock market. With stocks currently in a slump, you can contribute money to a plan now that will grow tax-free and still not be taxed when you take the funds out for eligible higher education expenses.


Also note that some states offer perks for contributing that can pay off in a big way.


Currently 30 states offer a full or partial tax deduction or credit for those who contribute, according to SavingforCollege.com. For example, the state of Indiana allows a 20% state tax credit on the first $5,000 you contribute per year.


Take Steps Now To Update Your Records


With many college plans changing drastically or falling apart this year, financial advisors Arik Jacobson and Pete Eliason of Eliason Financial in Sheridan, Wyoming say now is the time to get your ducks in a row in terms of record-keeping. For starters, you should get out all your paperwork and ensure your records are complete and match your distributions.


Also, moving forward, make sure you’re keeping excellent records of future qualified education receipts in case you face any questions after using 529 funds for college expenses that were ultimately refunded this year. This includes any receipts for expenses paid to schools themselves as well as receipts for books, computer equipment, and other purchases deemed eligible for 529 plan use.


College 529 savings plans can help you save money for college that gets to grow on a tax-advantaged basis until you need it. However, you should spend some making sure you don’t get hit with a penalty for reasons you could prevent — including the fact you failed to keep track of how the funds were spent.







This article was written by Robert Farrington from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.


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