If you’ve heard of 529 plans, you might think they can only be used to help pay for college. And you wouldn’t be alone: Less than one-third of adults properly identified that a 529 plan can be used for more than just higher education, a survey by Morning Consult and Edward Jones finds. But what are these other expenses?
Before we get to them, let’s review the main benefits of 529 plans. Contribution limits are high and earnings can grow tax-free if withdrawals are used for qualified education expenses such as tuition and room and board. (Withdrawals for nonqualified distributions are subject to taxes and a 10% penalty on the earnings portion.) Plus, as the account owner, you maintain control of the plan, so you can switch beneficiaries to another qualified family member, if necessary.
Now, let’s consider the other uses of 529 plans, which have been made possible by various pieces of legislation over the past few years:
Student loan repayments – The average amount of student loan debt per borrower is well more than $32,000, according to the Federal Reserve. So, many people welcomed the news that 529 plans could be used to repay student loans. There’s an aggregate lifetime limit of $10,000 in qualified student loan repayments per 529 plan beneficiary, plus $10,000 for each of the beneficiary’s siblings. Being able to use 529 plans to repay student loans gives you some flexibility if your family members have excess balances in their accounts.
K-12 expenses – A 529 plan can now be used to pay up to $10,000 per year in tuition expenses at private, public and religious elementary and secondary schools. This amount is per student, not per account. However, not all states allow 529 plans to be used for K-12 expenses – or to be technical, some states consider K-12 tuition to be a nonqualified 529 plan expense, which means the earnings portion of a 529 plan is subject to state income taxes and possibly a “recapture” of other state income tax breaks connected with 529 plan withdrawals. So, make sure you understand your state’s rules on K-12 expenses before taking money out of your 529 plan.
Apprenticeships – Not every child wants or needs to attend a college or university. And now, 529 funds can be used to pay for apprenticeship programs registered with the U.S. Department of Labor. These types of programs, which combine on-the-job training with classroom instruction, are offered at community colleges and trade schools. Once students complete their apprenticeships, they often go on to well-paying careers in a variety of fields. And since these types of programs are typically far less expensive than a four-year college degree, a 529 plan can have a particularly long reach.
The tax treatment of 529 plans for all these expenses can vary from state to state, so, if you move to another state after you’ve established your plan, you’ll want to know the rules. Even if you don’t move, it’s still a good idea to consult with your tax adviser about how 529 plan withdrawals will be treated.
Nonetheless, a 529 plan could be valuable to you in many ways. Consider how you might want to put it to work for you and your family.