It seems like the cost of college just keeps increasing for each generation. In order to combat these rising costs, Congress created a special savings vehicle to allow for tax-free growth and tax-free distributions. Despite being around for over a decade, 529 plans are still being under utilized.
If you are dreading paying for your kid’s college education, want a way to save up for yourself to go back to college, even if you pay for your own continuing education, you should consider opening a 529 plan.
Unlike retirement plans, 529 plans are run by each state. You can choose a plan from any state, you are not limited to the plan from your state, but some states only give you a state level tax benefit if you contribute to their plan.
- Missouri residents can contribute to any plan and deduct up to $8,000 ($16,000 if married filing jointly) from your state tax return.
- Kansas residents can also contribute to any plan, but the deduction is limited to $3,000 ($6,000 if married filing jointly)
These distributions can be used to pay for college tuition, room and board, books, supplies, fees, equipment (such as computers, internet access, etc.) Tuition can be for either traditional universities or trade schools. You must be enrolled in at least a half-time capacity for your room and board to be an eligible expense.
As of 2018, a 529 plan can also be used to pay tuition of up to $10,000 of K-12 education.
You lose out on the tax-free growth by using the money from the 529 plan to pay for K-12 education, but you still receive the tax benefits at the state level, and any unused portion can be kept to grow for college.
Once money has been contributed to a 529 plan, withdrawing the money for non-education purposes can trigger a 10% penalty, with an exception. If the student is awarded a scholarship, you can withdraw funds equal to the amount awarded penalty free. The withdraw will still be subject to taxes.
Account holders can also change the beneficiary if one child decided to not attend college and takes a different path.