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📆This Week’s Topic
This week I want to explore a brand new topic, college and education savings. One of the most popular college education savings accounts is a 529 account. The 529 account was developed over 30 years ago and allows for tax free withdrawal on eligible tuition and supplies. While there are no federal tax breaks for contributing to the account many states offer tax breaks for these accounts. These accounts are widespread and in the US there are 17 million account holders whose accounts hold over $525 billion.
🎓 The Old 529 Structure
Before these new 529 laws that were implemented in July that widely expanded the range, the 529 account the eligible withdrawals were very limited. You were allowed to withdraw $10,000 per year to pay for kindergarten up to 12th grade. The amount of the withdrawal for a registered college is unlimited and few other programs were allowed but only through a community college. Now there have been lots of updates to these 529 laws.
🏫 The New 529 Structure
These new updates are allowing wider variety of schooling. Now, instead of other program (a program that is run like a course that fees are required) having to be only at community colleges they can be in a lot more places. There is now a central list containing all the programs that are eligible for 529 withdrawal. In addition, the K-12 annual limit increased from $10,000 to $20,000. Also, new education expenses are now allowed, now students are allowed to withdrawal from the 529 for materials required for a course that gives certification. For example, if you did a course that you needed to purchase a $50 software license and a $100 for the course and they do give you certification would be eligible although, a course with the same $100 course and $50 software that didn’t give a certification would not be eligible.
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📛Consequences For Non-Qualified Withdrawals
Using the 529 account for non-qualified withdrawals can lead to harsh tax penalties. If you withdraw money from the 529 account that is used for a non-qualified purchase you will pay income taxes on the withdrawal as well as 10% penalty. These penalties are very harsh so make sure only do qualified withdrawals. For example, if you withdrew $25,000 to pay for high school tuition $20,000 of it would be withdrawn tax and penalty free however the limit is $20,000 per year so you would owe the government $500 (10% penalty) plus income taxes on the extra $5,000.
🏦 Rollover Options
You can actually move money to a different account if there are still funds in your 529 account and you no longer need them. You can rollover $35,000 in your lifetime to a eligible Roth IRA account (individual retirement account). There are a couple requirements such as you need to follow the annual contributions limits on the Roth IRA so you might have to split your 529 transfer into multiple years. Also, the 529 plan must be open for at least 15 years old to be eligible to make the transfer.
⏳ Final Summary
In summary, 529 accounts are a very good way to save for college or other education. They allow for a way to make withdrawals for education tax free. Although, you must take them with a grain of salt as if you withdraw for an unqualified expenses you must pay a 10% penalty as well as be subject to taxes. For example, if you paid $100,000 for an unqualified course and paid it all with a 529 account withdrawal you would have to pay $10,000 to the government in penalties and be subject to taxes on the $100,000. There have been many updates this July in the 529 plans. For one withdrawals for K-12 education has its limit increased from $10,000 per year to $20,000 per year. Also, they have a lot more programs that are qualified. Any program that gives certification is considered to be qualified and able to be put on this list.
🙏Thank You & Important Information
Anyway, thank you so much for reading this edition of Friday Finance. I am really glad you guys are supporting us so much. It has been over 300 days since we started this newsletter. We have almost reach 40 article written which is a great milestone. That is almost 30,000 words. Anyway, have a great week and I will see you next week.
Jacob Gans
Friday Finance
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