Your son or daughter has finally graduated from high school and soon will be heading off to college. Before he or she even meets their professors, you will have received the first of many tuition bills from the college bursar’s office. It’s a good thing you’ve been saving for college with a 529 plan. You’ve got money set aside for just this very occasion. But once you’ve entered the “529 withdrawal phase”, be sure you make the right decisions when tapping your 529 account. Here are six mistakes you’ll want to avoid:
Parents can withdraw money from a 529 plan at any time for any reason. However, the earnings portion of a non-qualified distribution will incur income tax and a 10% penalty. To enjoy the full tax benefits of a 529 plan, funds must be used to pay for qualified higher education expenses.
In 2020, many families are trying to make the most of their tax-advantaged savings accounts. Those saving for retirement may deposit up to $6,000 to an IRA or Roth IRA ($7,000 if you’re over age 50) and up to $19,000 to an employer-sponsored 401(k). But what about college funds? That’s where it can get tricky, since the IRS doesn’t specify an annual contribution limit for 529 plans and many 529 plans offer high total contribution limits.
Room and board costs make up a large portion of a student’s total college bill, second only to tuition. You can use a 529 plan to pay for room and board, but only if certain requirements are met.
Room and board includes the cost of housing and the cost of a meal plan. Colleges typically have a room and board budgets for students who live on campus in college owned or operated housing, for students who live off-campus in an apartment and for students who live off campus with their parents or other relatives. Some colleges have a fourth category that includes students who live on a military base or who receive the basic allowance for housing (BAH), which includes room and covers board only.
A 529 college savings plan is a specialized savings account that is used to save money for college. Each 529 plan account has an account owner, who controls the investments and selects the beneficiary, and one beneficiary. The account owner and beneficiary may be the same person. The money in a 529 plan may be used to pay for the college expenses and K-12 tuition of the beneficiary, tax-free.
Many families find that 529 plans work well, helping them achieve their college savings goals. 529 plans make it easier to save, with the option to schedule automatic investments as low as $15 or $25 a month transferred from a bank account or payroll check.
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