By Kerri Tassin, J.D., CPA
As a university instructor who teaches taxation courses, I’m frequently asked, “What is a 529 savings plan?” Perhaps the individual making the inquiry heard reference to this plan on television, heard it mentioned in conversation, or saw something regarding this plan on the internet. A 529 savings plan is a tax favored savings plan for college expenses, and may be known by other names as well. For those who wish to plan for the future, a 529 savings plan can serve as a resource down the road to pay for such things as tuition, equipment, books, and room and board.
According to the National Center for Education Statistics, enrollment in degree granting educational institutions increased from 2001 to 2011 by 32 percent. Total enrollment during those years grew from 15.9 million to 21 million students. The Center explained in its report that the increase could be attributable to both population growth and increased rates of enrollment. Whatever the cause of the growth, it appears that a significant portion of the American population needs to seriously consider how to meet the costs of a college education. A 529 savings plan may be one way to prepare for the future.
A “529 plan” derives its name from the Internal Revenue Code section which makes provision for the plan. According to IRC §529, a 529 savings plan must be established and maintained by a State, or the State’s agency or instrumentality, and the purpose of the savings plan must be to meet qualified education expenses of a designated beneficiary. Missouri established a 529 college savings plan which it calls its “MOST” 529 college savings plan, and it is overseen by the state treasurer.
Persons may contribute to an account set up for a designated beneficiary. The person who sets up the account acts as the account owner, and may designate a particular beneficiary or even change the beneficiary after one has been previously designated. The account owner controls the account; the beneficiary does not. A student or future student usually fills the role of the designated beneficiary.
The tax benefit of a 529 savings plan generally increases with time. While the account owner may not deduct amounts contributed to the 529 savings account for federal tax purposes, earnings on the contributions to the account generally grow tax free. Consequently, the earlier the account is created, the longer those tax free earnings will have to accumulate. Contributed amounts may also qualify for a state income tax deduction.
The earnings in the 529 savings plan generally remain nontaxable upon withdrawal as long as the funds are used to pay for qualified higher education expenses. Qualified higher education expenses may include amounts paid for tuition, fees, books, supplies and equipment required for enrollment or attendance at the beneficiary’s eligible educational institution. Qualified education expenses may also include a reasonable amount paid for room and board. Students generally must be enrolled at least half-time for the academic period. Amounts withdrawn for other purposes may become taxable and subject to penalties. Timing of withdrawals may be important when taxpayers qualify for other tax benefits such as education credits and exclusion from income of scholarships and other educational assistance payments.
The material in this article is for informational purposes only and does not constitute tax advice. Please consult with your own tax advisor regarding your personal tax situation.
This article appeared in the June 15, 2014 issue of the Springfield News-Leader. It is available online here.
Kerri Tassin, J.D., CPA, is director of the master of accountancy program in the School of Accountancy at Missouri State University. Tassin also is the director of the Volunteer Income Tax Assistance program and the director of the Low Income Tax Clinic at MSU. Email: email@example.com.