A 529 Savings Plan is designed to facilitate savings for higher education at all levels, from undergraduate school to a graduate program and beyond. As long as college and expenses qualify, you can enjoy the tax benefits of a 529 plan while reducing your reliance on student loans for higher education.
What is a 529 savings plan?
A 529 plan is a tax-advantaged education savings plan. Originally it was designed to cover post-secondary education costs only, but now you can use it for K-12 teaching and learning programs as well. You can also use a 529 plan for higher education.
The money you contribute to a 529 plan grows tax-free, such as a Roth IRA or a Health savings account (HSA). And when you withdraw money from your 529 plan to pay for qualifying expenses, those distributions are also not taxable.
Additionally, many states offer either a tax deduction or tax credit for those who contribute to a 529 plan, making it even more attractive to parents who want to save for their children’s education. For example, the state of Indiana offers a 20% tax credit (up to $ 1,000) for contributions made to a 529 savings plan in a calendar year. That said, there are strict requirements to maintain the tax-exempt status of your contributions and withdrawals.
Using your 529 savings plan for higher education
While many parents use a 529 savings plan to cover a student’s undergraduate education, 529 plans can also be used to help pay for a graduate degree. If you are considering using a 529 plan for your graduate education, here are a few things to keep in mind.
Eligible financial institutions
In order to use the funds in your 529 Savings Plan for your graduate studies, you must attend a qualifying educational institution. In general, this includes any college, university, vocational school, or other post-secondary institution eligible to participate in the US Department of Education’s student aid program.
This includes most graduate and vocational schools in the United States, as well as some foreign educational institutions. So whether you attend medical school, dental school, or business school, there is a good chance that you will be able to use your 529 plan funds.
Your school should be eligible if it is on the Ministry of Education list. database of accredited post-secondary institutions and programs.
A 529 savings plan can be used to pay for eligible education costs. According to the IRS, this includes tuition, fees and other related expenses incurred by:
- You or your spouse if you are filing a joint income tax return.
- A student who you declare as a dependent.
- One third, including relatives and friends.
Beyond tuition and fees paid directly to an accredited institution, other expenses may include books, supplies, equipment, accommodation and meals (if you are enrolled at least part-time), IT expenses and special expenses. Note that this is only true for 529 savings plans, not 529 prepaid plans, which are a different type of product with more limited uses.
Video: How to use a 529 plan to save for college (CNBC)
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If you withdraw the money for non-qualifying expenses, the winnings portion of the withdrawal will not only be taxed as ordinary income, but you will also be subject to a 10% penalty. In other words, you won’t pay tax or penalty on what you contributed to the account because that money has already been taxed by the government. But you will be responsible for these charges on any investment income you have received from the account.
An exception to this rule is that if the student receives a scholarship, he or his parents can withdraw up to the amount of the scholarship and use that money without penalty. You will, however, have to pay income tax on the portion of the withdrawal that can be attributed to investment gains.
Change of beneficiary
In the event that a student does not need the full amount that was saved for them in a 529 plan, it is possible to change the beneficiary instead of taking the money for other reasons and paying taxes and a penalty. In addition, the change of beneficiary of a 529 plan is free.
So if there is another student in your family who did not use all of their 529 plan funds by the time they left school, the account owner can make you the beneficiary in the future. , allowing you to use the money to cover your graduate expenses.
Who should use a 529 plan for graduate school?
The main advantage of 529 savings plans is that the money in the plan can grow tax-free, and the distributions are then tax-free when used to cover expenses. eligible graduate studies. If you live in a state that offers tax benefits for the contributions you make to a 529 savings plan, then using one can help lower your tax bill while making it easier to cover college expenses.
In general, 529 graduate plans make the most sense if:
- You have a high income and are looking for ways to maximize tax benefits.
- You have money left in a 529 plan after you pay for your undergraduate education.
- You started saving early.
What are the disadvantages of using a 529 plan for graduate school?
One of the downsides of a 529 savings plan is that it is an investment, which means there is volatility. If you invest the money in a 529 plan in stocks or mutual funds so that your savings can grow over time, you may lose money in your account over a short period of time.
This risk is especially important to consider if you are saving for your higher education at the last minute. After all, investments are never guaranteed to show a positive return, but this is especially true over shorter time frames of a few years. If you’re putting money into a 529 plan that you might need this year or next year, for example, the possibility of your account balance going down should be on your radar.
Also be aware that money from a 529 plan can impact your eligibility for financial assistance, and 529 funds in your name have a greater impact than funds held by a relative. This is worth considering if you are an adult paying for your own higher education and considering a 529 plan.
The bottom line
Using a 529 savings plan for graduate studies can make it easier to purchase your degree and avoid student loans as much as possible. Before taking this step, however, it’s important to understand both the pros and cons of 529 plans and how to maximize their value and avoid penalties.
In addition, you may also want to consider other education savings plans, such as a Coverdell Education Savings Account or one Roth IRA. As you shop around and compare all of your options, you’ll be in a better position to choose the one that’s right for you.