April 2021
College and Tax Planning

One of the biggest apprehensions we hear from parents and grandparents when discussing 529 plans is, “What if my child or grandchild doesn’t go to college?” While ideally the funds would be used for the intended purpose, there are options if life does not go as planned.

The reality is that you will never lose all of your 529 plan savings, no matter what path your child decides to take. Your contributions (what you put in) are made with after-tax money and therefore will never be taxed or penalized. If you take a non-qualified distribution – meaning a distribution not used for appropriate expenses - you will owe ordinary income tax and a 10% penalty on the earnings portion of the distribution only. There are a few exceptions to the penalty rule, such as if the beneficiary dies, becomes disabled, gets a scholarship, or decides to attend a U.S. military academy.

Just because your child or grandchild decides not to go to college doesn’t mean you have to liquidate your 529 plan. Here are some other options to consider so you can avoid paying taxes and penalties and keep more of your savings:

• Pay for the beneficiary to attend a community college, trade school, vocational school or other post-secondary education at an eligible institution.

• Change the 529 plan beneficiary to a sibling or other qualifying family member who will go to college or a private K-12 school.

• Make yourself the 529 plan beneficiary and use the funds for your own continuing education.

• Save the funds for a future grandchild. 529 plans do not have time limits, so you can let the funds grow indefinitely.

Your child may decide to take a path other than traditional college, but they will most likely have to pay for some sort of postsecondary education or career training. In most cases, saving for college in a 529 plan is worthwhile, despite the chance of having to pay taxes and penalties on a non-qualified distribution.

Remember, too, that there are often tax advantages to making 529 plan contributions and that those contributions can be made up until you file your 2020 tax returns!  Please call us at the office with any questions, or to open a 529 college savings plan for your child or grandchild.

If you have questions, please contact us.

MARKET UPDATE
FINANCIAL PLANNING
401(K) ALLOCATION

To download the April 2021 Newsletter: CLICK HERE