Top 5 Things to Consider Before Withdrawing Money from a 529 for Non-Qualified Purposes

 

Top 5 Things to Consider Before Withdrawing Money from a 529 for Non-Qualified Purposes

 

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529 plans are one of the smartest ways to invest and save for higher education; however, many of the benefits of a 529 plan are lessened if you withdraw savings for non-qualified purposes. Here are 5 things to consider before withdrawing money from a 529 for non-qualified purposes.

1. One of the benefits of a 529 plan is that withdrawals can be made tax free if used for qualified education expenses! When withdrawals are used for other, non-qualified purposes, the earnings portion of the withdrawal is subject to federal income taxes and any applicable state income tax, as well as an additional 10% penalty. New Mexico residents are subject to the recapture of all previous New Mexico tax deductions taken for contributions to an account used for non-qualified expenses. Note that your initial contribution portion is not subject to tax or penalty if it was made with after-tax dollars.

2. A non-qualified withdrawal can incur a 10% penalty on earnings. There are a few exceptions to this rule. A penalty may be waived under specific circumstances, such as if a beneficiary dies or becomes disabled, a beneficiary receives a tax-free scholarship, or if they attend a U.S. Military Academy. Contact your 529 plan if you suspect these exemptions apply to you.

3. Tuition and textbooks aren't the only educational expenses one may face. Many other expenses during education count as "qualified expenses." This includes room and board, computer equipment and technology, many international programs, and more. Qualified expenses will not incur tax or a withdrawal penalty.

4. There is no penalty for leaving leftover funds in a 529 plan after a student graduates or leaves college, and funds do not expire. This means that funds not spent can be used decades later. Leftover funds in a 529 plan can make it financially possible for a benefactor to go back to school to change or advance their career at any stage of their life. A recent survey by the Bureau of Labor Statistics found that the average Baby Boomer held 12.4 jobs over the course of their working life, and surveys indicate that about one-third of college graduates will change careers at least once in their lifetime.

5. Leftover or unused 529 funds can also be rolled into another beneficiary's account. This can be an option if you have multiple children or you would like the funds to be available for future grandchildren or loved ones. The longevity of a 529 plan also means that your savings can benefit from growth over time.

 

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For more information about The Education Plan, call 1.877.337.5268 or view the Plan Description and Participation Agreement, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing.

Please Note: Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program. You also should consult a financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plan’s features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.

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