Five Questions for Clients Contemplating Using Their 529 Plan Early

 In Retirement Planning & Wealth Management

When your clients came to you seven years ago to save for their first child’s college tuition, you drew them on board with the prospect of a long-term investment that would grow tax free in a 529 plan. It may be time for another call: recent tax-reform legislation included key changes that could impact how your clients choose to spend their educational savings.

Notably, tax-free distributions from 529 savings plans may now be used for elementary and secondary school expenses, up to $10,000 a year per child. And as your clients are contemplating sending their little one to private school, they may be wondering if it’s a good idea to tap into their 529 early. Knowing their options could help you steer the conversation in the best direction for the family’s long-term objectives.

What’s at the Crux of this Change?

A 529 plan has become a resource to help with educational expenses other than college as an education can represent a myriad of possible – and rising—expenses beyond tuition, activity fees, study abroad or even a thirteenth-year option.

However, being prepared to help your clients means finding out what they intend to use the money for — and knowing what expenses qualify.
Here are five questions to ask your clients that will help you get a better idea of whether accessing the money in their 529 plan is right for them:

  1. Will this money help their student with expenses related to housing?
  2. According to the IRS, earnings are not subject to federal tax, and generally not subject to state tax, when used for qualified education expenses including room and board at an eligible education institution.

  3. Are the credits going to advance the completion of a degree or a diploma?
  4. Although there are plenty of non-degree programs and zero-credit courses that offer valuable life lessons, if the courses don’t meet the standards for Lifetime Learning Credit, the class may not qualify.

  5. When will the expenses you want to use 529 funds for occur?
  6. According to the IRS, your 529 can be used for expenses in an academic period that starts during the tax year or the first three months of the next tax year.

  7. Has your client’s home state made any changes around 529 tax deductibility?
  8. 529s are sponsored by states. Check out our Wealth Advisor’s Guide for a list of states that have made changes to their local 529 Plans.

  9. Is homeschooling the right solution for your family?
  10. Pre-college expenses under the new law qualify for private and public schools, but not for home schooling.

Remind your clients to consider the overall cost of their child’s primary versus secondary education. It may cost them more in the long run as funds won’t be able to grow and taxes won’t be deferred over a longer period of time.

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Investors should consider, before investing, whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program.

Tax information contained herein is not intended or written to be used, and it cannot be used by taxpayers for the purposes of avoiding penalties that may be imposed on taxpayers. Such tax information and any estate planning information is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice.