May 22, 2019
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Qualified Tuition Programs (529 Plans)
On the surface a 529 plan is straight forward, pick your student, establish and maintain the plan through either a state or an eligible education institution, and have patience while compound interest takes over. Understanding the basics of a qualified tuition program will enable you to plan for the future of your student beneficiary. Although 529 plans are not for everyone - establishing a QTP is an important decision for your family - choose the account that is in-line with your educational vision.
The key advantages of a 529 plan is that earnings from contributions grow exempt from federal income tax, as well as state tax, as long as distributions are used for qualified higher education expenses at an eligible educational institution.
Contributions
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Qualified tuition program contributions must be made in cash and must not be more than the necessary amount to provide for the qualified educational expenses. Contributions to 529 plans are not deductible for income tax purposes and anyone can contribute to the students educational savings account. The IRS allows a taxpayer to contribute to both a QTP and a Coverdell ESA account in the same year for the same student beneficiary.
Qualified Higher Education Expenses
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Qualified higher education expenses must be related to tuition, fees, books, supplies and equipment required by an educational institution for enrollment or attendance. These expenses also include the reasonable cost of room and board for a student that is enrolled at least half-time. Qualified higher education expenses may be reduced for tax-exempt scholarships or fellowship grants as well as for other tax-free educational benefits.
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Eligible Educational Institutions
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As of December 31, 2017, qualified higher education expenses also include eligible educational institutions such as an elementary or secondary school during the tax year - including public, private, or religious schools as long as expenses do not exceed $10,000 per year.
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Distributions
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As long as any funds distributed from the QTP are used to pay for qualified educational expenses a beneficiary student is not required to include any amount in gross income. Typically, this represents a return of capital invested. This is an important fact because distributions that are includable in a student beneficiaries gross income are subject to a 10 percent additional tax or penalty (Code Sec. 529(c) (6)). The transfer of a student beneficiary QTP or 529 plan is permissible and is not considered a distribution as long as the new student beneficiary is an eligible individual and a family member of the former beneficiary.
You're not required to withdraw funds from a 529 plan. However, if for whatever reason the funds aren't used for educational purposes then distributed funds are typically subject to Code Sec. 72 annuity rules. Basically, your initial principal is not taxed but earnings are subject to ordinary income taxes plus the 10 percent penalty tax.
Conclusion
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Qualified Tuition Programs can be a great way for parents, family members, and friends to save for a student's education. Considering the rising cost of education QTPs offer unique incentives. Understand how a 529 plan works before you open the account so that you open the best account for your designated beneficiary. For more information and professional consulting for your business, contact us today.
