Saving for College Today

Ivy Alexander |

A 529 account is a tax-advantaged investment tool designed to assist families save for future college expenses. Money invested in a 529 can grow tax free, and distributions remain tax free if the funds are used for qualified educational expenses. Funds that are not used for qualified expenses are taxed on the earnings portion of the distribution and receive a 10% federal tax penalty.

States also offer tax deductions for contributions, but each state has their one rules so be sure to check with your local rules. As well, many states require that their own state 529 plan is used in order to qualify for the state tax deduction.

There are generally two types of 529 accounts: Prepaid Tuition plans and College Savings Plans. A prepaid tuition plan offers the ability to lock in current tuition rates for future students but tends to be less flexible than the college savings plan. The College Savings Plan allows you to save for tuition as well as other qualified education expenses while giving broad based investment options for your deposits to grow over time.

Distributions can be used to pay for many qualified educational expenses, such as tuition, fees, books, computers, and some room and board costs for college. Beginning in 2018, up to $10,000 per year per beneficiary can be used from a college savings account for K-12 private school tuition.

• College savings funds can be distributed for expenses incurred at an eligible four- year institution, community college or a trade school. To determine if an institution is considered eligible one can check FASFA to see if the school has a school code.  

•Room and board are considered qualified expenses if the student is enrolled on at least a half-time basis. If the student lives off-campus, qualified room and board expenses cannot exceed the institution’s room and board allowance for the school year.

• Study abroad programs may be a qualified expense if the student’s home school gives credit for the program or the program offered by the foreign institution has a Federal School Code. Travel expenses to the study aboard program are not a qualified expense.

More information on qualified educational expenses can be located on IRS Publication 970 .

Maintaining complete and accurate records of educational expenses is very important in the event the IRS requests receipts for distributions. 


Impact of 529 on Financial Aid Eligibility

For colleges to determine the amount of aid a student may qualify for, the Free Application for Federal Student Aid (FASFA) must be completed. The institution will use the information provided on the FASFA along with tax returns, to calculate the students Expected Family Contribution (EFC).  The lower EFC indicates more financial aid eligibility.

The FAFSA considers income and assets from both Parents and Students. Based on the ownership of the College Savings plan the assets will determine if it is a parental asset or a student asset.  If the parent is the account owner, the funds will be considered parental assets and if the student is the owner the funds are considered student assets.  A maximum of 5.64% of Parental assets are counted in the calculation of EFC, while 20% of student assets are evaluated.  

For accounts owned by a grandparent, the funds are not used in the calculation of EFC until they are distributed. Once a distribution is made from a grandparent account, 50% of the distribution will be viewed as student income which will impact the future years EFC calculation.

Many grandparents generously open 529 accounts to benefit their grandchildren. As well, since there is often a state-tax benefit, the grandparent’s become the owners of the account. One effective strategy when dealing with grandparent owned 529 accounts is to wait until the student’s Junior year of college to take a distribution. Distributions made after January 1st of the student’s sophomore year of college won’t show up on the FAFSA if the student graduates in four years. In doing so, the impact on financial aid calculations is minimized as the FAFSA.




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