The average cost for tuition and fees for an in-state public college in 2017 was just under $10,000 per year, according to the College Board. The average estimated cost for the 2018-19 year is $10,230. That does not account for room and board (mandatory for freshman at many schools), books and supplies, transportation and other expenses. That would bring the annual price tag closer to $26,000.
But what if you or one of your children (or grandchildren) wants to attend an out-of-state university or a private college? Now you are looking at almost double the cost – and that’s just for one year. Unless something dramatic changes, the trend will likely continue upward.
Setting up a 529 plan is a good option for saving for future qualified higher education expenses up to $500,000 for a single beneficiary.
You can set up a 529 plan for anyone, including yourself, and change the beneficiary to another family member without penalty at any time.
Qualified education expenses include tuition, fees, room and board expenses during an academic period, textbooks, supplies, required equipment, computers, software, and other special needs services required for enrollment or attendance.
A 529 plan is also not limited to post-secondary education expenses. As of 2018, the term “qualified higher education expense” includes up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Contributions to a 529 plan, however, are not deductible.
Contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $15,000 during the year.
As an employer, please note that any contributions to an employee 529 account – including those for children or relatives of an employee – are considered taxable wages to the employee and therefore all federal and state withholding rules apply.
The money you invest will always belong to you. If your plan beneficiary receives a scholarship or decides to not pursue any higher education, the funds you have invested are still yours.
You can continue to let the funds grow to be used for graduate school, transfer the account funds to a member of the current beneficiary’s family (as defined by IRC Section 529) without penalty, or simply withdraw the funds.
Any withdrawn earnings that are not used for qualified higher education expenses, however, are subject to a 10 percent federal tax penalty (with certain exceptions for death and disability), federal and state income taxes on the earnings.
Please let us know if we can help you in any way.
Deanna Olton, CPA, is the Tax Director for Antares Group, Inc. Deanna can be reached at firstname.lastname@example.org.