529 Savings Plans: How Bad are the Non-Use Penalties, Really?
Today is 529 Day, and I am sure you are seeing a lot of articles encouraging you to open and fund 529 Savings Plans for your children, grandchildren, nieces, and nephews. At College Coach, we talk to thousands of families a year who are thinking about saving for college, and 529 Savings Plans are one of the most popular ways our clients choose to save for college.
In almost every discussion we have, people ask “What happens if my kids don’t go to college?” It’s a great question to ask, because there are taxes and penalties that apply when people withdraw money from 529 Savings Plans but cannot match the withdrawal to college costs for the plan’s beneficiary.
Did you invest in a prepaid tuition plan? Is your child about to go off to college? Congratulations if you answered yes to both of these questions! You probably got a great rate of return and have some of your son’s or daughter’s tuition already paid. And here’s some more good news: all that investment growth you got from paying for college in the past will be tax free to you when you use the Plan to pay for college today. All prepaid tuition plans are 529 plans (except the Massachusetts Prepaid Plan, which derives its tax-free status from another section of the federal tax code) and share all of the tax benefits of 529 savings plans.
Unfortunately, using your prepaid tuition plan is not as simple as writing a check to the college. You’ll want to take some steps now so that you use the plan properly when the bill comes due.
Happy 529 Day — aka Educational Savings Day (5/29, get it?). A toast to all the savers!
If you have a child enrolling in college, and you’ve saved for it in a 529 Savings Plan, congratulations! It’s time to get your tax break! While paying for college with 529 Plan assets is not difficult, there are a few things to keep in mind. Here’s what you should know: