Shawn Anderson: 5:11 on WTOP. Fall semester tuition payments are due in the next few weeks and college students and their parents will be tapping their 529 College Plans to pay for those education expenses. There are important changes and expanded uses that began in January. So, it's a good time right now to review what's allowed and what's not.
Hillary Howard: Joining us live, Nina Mitchell, co-founder of Her Wealth and Senior Wealth Advisor at The Colony Group in Bethesda. Great to see you Nina.
Nina Mitchell: Great to be here, thank you.
Hillary: So, the tax cuts and jobs act brought some significant changes to those 529 plans; tell us what the changes were?
Nina: Well, under the new tax law beginning January first of this year, 529 plans which actually have been around for over 20 years, were expanded beyond just qualify college expenses in two important ways. And the first: families are now allowed to use their 529 plans to pay for $10,000 of private school tuition, per student, per year for kindergarten through twelfth grade. And then secondly: the new law allows for tax free rollovers from traditional 529 plans into 529 able accounts. And for those who don't know what a 529 able account is, it's similar to a 529 College plan, only the funds have to be withdrawn for qualified disability expenses and the beneficiary has to be diagnosed with a disability before age 26. So, just keep in mind, for the 529 account balances, they have to be under $100,000, so that the beneficiary can still qualify for public aid
Shawn: Now, for those who are using their 529 Plans to pay for college expenses, which ones are allowed, which ones don't qualify?
Nina: Shawn, great question and we get asked that a lot. Some of the most common qualified college expenses, are of course, tuition for full time and part time students. Room and board, both on and off campus and for off campus housing and meals, you can exceed the college's on annual allowance published in their attendance figures. Technology expenses, such as computer, software, printers, iPads, internet service, that's all allowed. And other qualified expenses, include required lab and tech fees, textbooks and supplies and similar types.
Now, the list of expenses that you might think qualify but don't, are as follows: transportation and travel of any kind is not qualified, student health insurance, even if it's billed by the university is not allowed. Student loan payments, club and activity fees and of course lifestyle and personal expenses, like cell phones and mini fridges, they don't qualify.
And just remember, if money from a 529 plan is used for a non-qualified expense, then the earnings portion of that distribution is taxed as ordinary income, plus there's a 10% penalty. But the principle portion is never taxed or penalized.
Hillary: We only have 30 seconds. But if a student has more than one 529, does that change things for them?
Nina: Well, it's just important to plan ahead since financial aid will be impacted by who owns the 529 Plan and the timing of those distributions. So, to maximize your eligible federal student loan amounts, it's more advantageous to take withdrawals from a 529 owned by a parent in the early college years and then use your 529 plan owned by a grandparent for the later years, like your junior or senior year. And just lastly, just keep in mind that grandparents and other third parties they may be able to make give contributions directly into an existing parent owned 529 if the custodian allows it.
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