Plan 529: Not Just for College

Misconceptions — and even an aura of intrigue — often color conversations about the MOST 529 College Savings Plan that many Missourians have been using to save for and fund a college education for two decades now.

For instance, did you know:

1. MOST 529 funds can be used for a wide range of educational costs, not just a four-year college or university. Costs for K-12 education — whether public, private, or religious — and trade school tuition are also covered.

2. The expected family contribution section on a student’s Free Application for Federal Student Aid, or FAFSA, excludes the first $20,000 of parental assets, whether in checking accounts, 529 Plans, or similar sources. Therefore, a MOST 529 savings plan does not exclude a college-bound student from qualifying for need-based aid.

3. The 529 Savings Plans are sponsored by individual states, but the funds can be used to attend any qualified college, university, or trade school. In other words, investment in Virginia’s plan can be used to pay for college anywhere in the United States and even abroad as long as the post-secondary institution is qualified.

4. A Missouri family with a 529 plan in another state will still reap the tax benefits on its Missouri taxes.

There certainly are an abundance of questions about MOST 529. Fortunately, there’s a broad range of expertise among Columbia financial planners and advisers to help navigate the situation and take any mystery out of the important tax-free savings plan.

What is a 529 savings plan?

The 529 plan gets its name from Section 529 of the Internal Revenue Code and has powerful tax savings implications. Earnings in a 529 plan grow federally tax deferred; qualified withdrawals are tax-free; and some states, including Missouri, have additional tax benefits.

The account owner, whether a parent, grandparent, friend, or other relative, can pick the investments, select a beneficiary (son, daughter, niece, nephew, or grandchild, for example), and determine how the money is used. The account owner can even open a 529 plan for him or herself.

Getting Started

The No. 1 piece of advice from Leann Knuth, general manager and principal at LaBrunerie Financial, is to simply start a plan. 

“You can start small,” she says. “Some plans will even let you open an account with $1. We talk about doing $25 a month.”

Leann uses an example of $100 monthly contributions to a 529 plan, “something that’s not way outside” a family budget.

“Even if you just start out when they’re babies, that can pay about a quarter of room and board for college,” she adds. “That’s really good savings.” Not only will it build a college fund — capped at $325,000 under the MOST 529 plan — but it’s also a tax savings of 6 percent. 

The MOST 529 website can walk investors through the process, and do-it-yourself is the preferred method under the MOST rules, including setting up electronic payments as automatic contributions from a paycheck or personal account to the 529 account.

Leann encourages a look at 529 savings to finance more than just a college or university education. If the school or program is eligible for Title IV federal student aid, then the student may use 529 savings for tuition and qualified expenses. Some of those include technical,trade, and vocational programs; culinary schools; cosmetology; golf academies; and even Department of Labor-approved apprenticeships. Other little-known uses include the cost of equipment for on-the-job plumbing training if the trade school program is eligible for Title IV federal student aid.

“Most people don’t realize that,” Leann says. “It’s not limited to a four-year school. There are so many other things you can use it for.” Having the ability to claim 529 contributions on Missouri state tax returns — even if the 529 plan is not based in Missouri — is another misunderstood perk.

“They really let you look around to meet your needs, rather than just what MOST is offering,” Leann says.

In the Event of Death . . .

Two of the most common questions about 529 plans are: What if my child or grandchild — the plan beneficiary — doesn’t want to go to college? And what happens if my beneficiary dies?

In either case, the account can be transferred to another beneficiary without penalty, says Polly Reynolds, vice president and trust officer at The Trust Company. If the funds are withdrawn and used for non-qualifying expenses because of a death, the account owner will pay federal and state tax on the amount of those expenses, but not the 10 percent tax on earnings. If the funds are used for non-qualifying expenses because the beneficiary decides not to use the money for college, technical school, or other qualified expenses, the account owner will pay federal and state tax plus a 10 percent penalty on the earnings.

Other options to consider if a beneficiary decides not to attend college: stay invested, in case he or she decides to attend later (there’s no age limit on using the money) or change the beneficiary to another eligible family member.

The most important facet of making withdrawals is understanding what expenses are qualified and which are non-qualified, Polly says.

“Any time you take money out that’s not a qualified educational expense — unless it meets the exceptions — you’re going to pay federal and state tax on it and a penalty,” she cautions.

Among some of the other qualified expenses: special needs equipment for blind students; room and board, if enrolled at least half-time, and as long as the withdrawal doesn’t exceed the college’s estimate; and books, supplies, and even internet access if it’s for college use.

Leann says transportation and travel are also questions that come up a lot. That’s an easy, if disappointing, answer. “If someone has to fly back and forth” from home to college, “that is not a qualified education expense,” she says. The same goes for college testing and applications fees, as well as health insurance, even if it’s offered by the school. Sorry. Not a qualified expense.

Also not qualified: campus parking passes, smartphones, extracurricular activity fees, and fitness clubs and gyms. Even though the latter expenses are often included on the bill for tuition, room, and board, those items must be excluded from 529 plan expenses.

Overall, 529 plans are important savings and tax strategies, Leann says, adding, “I feel like this is a good program that more people can take advantage of.”

Front-loading Precautions

The 529 savings plans are especially attractive investment options for grandparents, some of whom use them in estate planning, Polly says. One approach is front-loading. For instance, a grandparent can give a grandchild a maximum of $15,000 a year without the money triggering gift tax requirements. Front-loading, however, would be putting up to $75,000 in a grandchild’s 529 plan, and then not adding any other contributions for five years. 

In fact, both grandparents could make individual $75,000 contributions in one sum — amounting to $150,000 total — then not add to the account until after five years, Polly explains. What that means, however, is that any additional monetary gift to that grandchild will trigger gift tax requirements and IRS Form 709.

Another 529 strategy, she says, comes from understanding that when it comes to filing for FAFSA (financial aid), a parent’s withdrawals for their student’s education is not considered income to the student. Withdrawals for the student from a grandparent’s 529 plan are considered income to the student. 

To counter that possibility, 529 rules allow a 12-month rollover from a grandparent’s savings fund to the parent’s savings fund so the withdrawals aren’t considered income to students.

Another scenario is when two siblings are beneficiaries of separate 529 plans, but one decides not to go to college or use the savings for qualified expenses. Polly says the accounts can be rolled into one for the other child’s qualified educational expenses. (Missouri’s limit for tax advantages is $325,000 in total of all accounts for one individual.)

Polly says that about 90 percent of her clients with 529 plans use the savings for college, with the other 10 percent using the funds for private school and other related qualified expenses.

What’s Your Goal?

Tyler Hoffmann, advisor associate at Convergence Financial, likes to take on the myth that investing and saving for college is something that only wealthy people can do.

“The approach we take, no matter what you are saving for, is to educate people on their optimal financial plan, and helping them live out their plan, Hoffmann explains, discussing savings and investment goals, designing a plan to achieve these goals and then tracking the process along the way.”

He says, “It’s absolutely why I like doing what I do,” adding that he enjoys seeing a client live out their financial plan and showing them how their investments are working for them. He would not say he’s enamored with 529 plans, but “I’m happy with the recent changes that now include K-12 education as a qualified expense.

Anything that offers more uses for this type of plan is usually going to be beneficial to the owner. Additionally, I think these changes give people more incentive to save money in these types of plans.” 

Expenses

Qualified

• Private school tuition — in the state of Missouri, you can use $10,000 of 529 each year
• Tuition at accredited institutions
• Room and board
• Technology items — computers, printers, laptops, software that is school/course specific, internet service
• Books and supplies
• Equipment necessary for a qualifying apprenticeship, trade school, or vocational school
• Special needs equipment
• Student loan repayment — $10k per kid lifetime limit and interest doesn’t count
• Cannot exceed the cost estimates for that item by the school they are attending (Financial aid office has this info and usually will post it on their website)

Not Qualified
(That you may think are or should be!)

• Transportation costs (parking pass, flights, car, bus, etc.)
• General electronics — i.e., cell phones
• Sports and fitness clubs or gyms — even if billed through the institution these are not considered qualified expenses
• Insurance — even if the health insurance is billed through the institution it is not a qualified expense
• College application and testing fees
• Extracurricular activity fees