Monument Resource Center
Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.
I’m sure you’ve heard of parents depositing money into 529 accounts to pay for their childrens’ education. College isn’t getting any cheaper, and these accounts offer tax advantages while letting you grow funds to pay for future education.
So, what can 529 funds be used for? While they can be financially beneficial, there are rules and limitations that you should know so you aren’t hit with unpleasant surprises later.
Required expenses, no frills
529s cover REQUIRED expenses only, but what qualifies as “required”?
- Tuition and fees can be fully covered for college, but for K-12 is limited to $10,000 per year.
- Books are covered only if they are required for a course. College bookstores can be fun to shop with all the school’s latest swag, but be careful of blindly covering any purchase from the bookstore that comes through on the student’s account! Only required items for the course will apply.
- Supplies are similar to books—only those required for courses qualify.
- Computers and related equipment such as internet routers are covered but smartphones aren’t.
What the IRS doesn’t consider required:
- Transportation: The IRS doesn’t consider transportation a “required” expense, no matter how far the student has to travel to attend class.
- Health insurance: The IRS doesn’t see student health insurance as a qualified expense or required for attendance.
- Have 529 distributions made payable to and sent directly to the school where possible to reduce the risk of making a non-qualified distribution subject to taxes and penalty!
- 529 withdrawals for education expenses might decrease your eligibility for education tax credits, such as the American Opportunity Tax Credit or Lifetime Learning Credit. If you qualify for those tax credits you’ll need to weigh whether you’d like to spend 529 funds now or let them grow and compound while taking the education credits. Make sure to consult your financial advisor or CPA.
On-campus or off-campus room & board–but be careful
Room and board are virtually necessary and add a substantial amount to your college bill, but you have to be careful. The costs can’t exceed the greater of the following 2 amounts:
- The allowance for room and board included in the school’s cost of attendance for federal financial aid calculations
- The actual amount charged if the student is living in housing operated by the school
Thankfully, most schools publish a page on their websites detailing the costs of attendance. You can often use those as references or contact the school to be sure.
Additionally, you can pay for both an apartment and groceries with 529 funds. Just ensure withdrawals for these expenses don’t exceed what the school includes as “room and board” in their cost of attendance.
- Keep careful records of those rent and food checks if sent directly to the student for tax time! Consider setting up a bank account dedicated to rent and food the student can access to receive 529 distributions earmarked for these expenses.
- Make sure qualified and non-qualified items are purchased separately and hold onto those receipts.
Beyond the traditional college setting
529 plans aren’t limited to strictly college expenses anymore. Here are some other ways you can use the funds:
- You can withdraw up to $10k per year from your 529 for K-12 tuition (private, public, or religious institutions). This is tuition ONLY–not other ancillary expenses.
- Apprenticeships – Not everyone chooses college–fees, equipment, books, and other supplies for registered apprenticeship programs are considered qualified.
- You can withdraw up to $10k (this is a LIFETIME limit) tax & penalty-free to pay down student loan debt—yours, your spouse’s, your child’s, or your grandchild’s. It’s important to note that you can’t claim any student loan interest deductions paid with this money.
- Consider trade-offs when using 529s for non-college expenses: you may be giving up longer-term growth potential with compounding tax-free earnings if you use funds for K-12 education or a beneficial tax deduction on student loan interest.
A 529 plan can be a great option for covering college costs, thanks to the tax advantages and compounding. Just remember, there are plenty of rules and limitations governing how you can use the money. Violate these, and you might face taxes or penalties.
Want help figuring out how to maximize the benefits of your 529 and see how college funding fits into your overall wealth management strategy? At Monument Wealth Management, we build Private Wealth Designs that serve as a blueprint for your life, financial and otherwise, to help you accomplish what is most important to you..
We’ll work with you to see how various college payment options, including a 529 plan, could fit into your Private Wealth Design. If you’re ready for a no BS approach to your finances and educational planning, let’s talk.
It’s time to find clarity around your finances and remove the anxiety of the unknown.
Read our case study, “High Earners Eye Retirement,” to see how we helped one of our clients with their wealth planning.
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