Answers to Common Questions About Saving for College

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By Kathryn Flynn

October 15, 2019

Saving for college is a top priority for many families. But, some parents hesitate to open a 529 plan because they are confused about how they work. Here are answers to ten common questions about saving for college that can help you plan for your child’s future.

1. How much should I save in a 529 plan?

The amount you should save for college depends on your child’s age and the type of college they want to attend. For example, it will cost significantly more for your child to attend a 4-year private non-profit college than a 4-year in-state public college. Aim to save at least one-third of the total cost and cover the remaining two-thirds with current income and student loans.

2. Which 529 plan should I choose?

There are nearly 100 different 529 plans available, with thousands of different investment options to choose from. Your home state may offer a state income tax deduction or state tax credit for 529 plan contributions. However, be sure to also take fees and investment performance into consideration when selecting a 529 plan.


3. Can I use a 529 plan to pay for an out-of-state college?

A 529 plan can be used to pay for post-secondary education at any eligible institution, including private colleges, in-state and out-of-state colleges, community colleges, trade schools and some international colleges.


4. What if my child doesn’t go to college?

If you end up with an unused 529 plan or leftover money in a 529 plan, you can change the beneficiary to a qualifying family member, use the funds to further your own education or save the 529 plan for a future grandchild. You can also withdraw 529 plan funds at any time for any reason. If the distribution is non-qualified, you will owe ordinary income tax and a 10% penalty on the earnings portion of the distribution. Any state income tax benefits you claimed may also be subject to recapture. 

5. Should I have separate 529 plans for siblings?

529 plans can only have one named beneficiary, which means you can only take qualified distributions for one child at a time. If you use the same 529 plan to save for multiple children, you must change the 529 plan beneficiary each time you withdraw funds to pay for qualified education expenses. There are no limits on the number of times you can change the beneficiary on a 529 plan. 

Having a separate 529 plans will allow you to maximize your investments based on each child’s age and investment horizon. Most age-based investment portfolios start out invested in stocks and stock mutual funds, and shift toward conservative investments such as bonds, money market funds and CDs as the beneficiary gets closer to college. 

You may also qualify for additional state income tax benefits by having separate 529 plans if your state allows you to claim income tax benefits for contributions per beneficiary as opposed to taxpayer. Grandparents using 529 plans as estate planning tools also benefit when there are separate 529 plans for each child, since the annual gift tax exclusion amount is per donor per beneficiary.

6. Should I use a 529 plan or Roth IRA to save for college?

You may use a Roth IRA or a 529 plan to save for college. However, a 529 plan has much higher contribution limits and receives favorable treatment on the Free Application for Federal Student Aid (FAFSA). A Roth IRA may be better if there is only one child there is a considerable amount of doubt as to whether the child will go to college. 

529 plan

7. Can you use a 529 plan to pay for K-12?

The Tax Cuts and Jobs Act of 2017 expanded the benefits of 529 plans to include K-12 tuition as a qualified education expense. Qualified K-12 distributions are limited to $10,000 in tuition expenses per beneficiary per year.

But, not all states have conformed to the federal tax law. In some states, a 529 plan distribution that is used to pay for K-12 tuition is considered non-qualified and subject to state income tax on the earnings portion of the distribution. Any state income tax deductions or credits claimed may also be subject to recapture.

8. What happens if my child gets a scholarship?

If you end up with leftover 529 plan funds because your child received a scholarship, you may take a penalty-free distribution up to the amount of the tax-free scholarship. However, the earnings portion of the distribution is subject to ordinary income tax. Similar penalty waiver rules apply when the taxpayer claims the American Opportunity Tax Credit. 


Financial aid, FAFSA

9. Is it too late to start saving in a 529 plan if my child is in high school?

It’s never too late to start saving for college. Every dollar you save is one dollar less that your child will have to borrow in student loans.

If your child is in high school, select low-risk investments for your 529 plan, such as bonds, CDs and money market funds, and keep your equity allocation at around 20% to 30%. Be sure to take advantage of any available state income tax deductions or credits, which can function like a discount on tuition

10.  How can I avoid paying taxes on 529 plan withdrawals?

529 plan distributions are tax-free when the funds are used to pay for qualified education expenses for the named beneficiary. When calculating your total qualified education expenses, subtract any amount used to generate the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit, since there is no double-dipping. 

529 plans do not have withdrawal deadlines, but 529 plan distributions must be taken during the same year that qualified expenses are paid.

A good place to start:

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