With the passage of the 2015 federal spending and tax package, several changes were approved for 529 college savings plans.
- Laptops, computers, and related technology will now be considered a qualified education expense. The technology includes printers, internet services, and software. The computer must be used by the 529 plan beneficiary during the period when they are enrolled in a college or university. Prior to this change, students had to prove that owning a computer was required by the school. This provision is also retroactive and purchases made since January 1, 2015, will be eligible.
- The law also includes a provision allowing a student to redeposit a college refund without triggering a tax. If a student needs to withdraw after starting the semester, due to illness for example, they can redeposit a tuition refund without penalty. The student must redeposit the refund within 60 days of receipt.
- Accounting rules for 529 plans will also be updated.
The use of 529 college savings plans continues to grow. According to the College Savings Plans Network, there are currently about 12 million accounts with nearly $250 billion in assets.
Proceeds from a 529 plan may be used for tuition, fees, room and board, books, and other qualified expenses. Anyone can contribute to the student’s account.
There are also several tax advantages with a 529 plan including:
- Account earnings are free of federal income tax
- A gift tax exclusion allows you to make five years’ worth of gifts to a single beneficiary in one year without triggering the federal gift tax
- In certain cases, contributions to the account can be used to decrease your taxable estate
- In some states, there are tax deductions or credits for making 529 contributions
Meeting the challenges of spending college savings
Most families use a combination of sources to pay for college. The largest contributors are parents. About 32% of college costs were covered by parents’ income and savings last year, according to Sallie Mae.
Like other financial plans, it’s important to understand the financial aid and tax implications of these sources. A financial advisor may help families optimize college savings and understand how and when to make withdrawals. Putnam’s investor education piece, “Strategies to make the most of college savings,” may be a helpful resource.