New opportunities for 529 planholders

If you want to provide educational opportunities for your children or grandchildren, you may want to consider investing in a 529 plan. In recent years, this plan has become more flexible and potentially more powerful than ever.

One of the main advantages of a 529 plan is that earnings are generally tax-free, provided the money is used for qualifying educational expenses. As the plan owner, you can essentially name any beneficiary you want, and you’re free to change beneficiaries as needed. The contribution limits are quite high, so you can set aside considerable sums in a 529 plan – and you may want to do so, as tuition fees have increased steadily over the years. In fact, for the 2021-22 academic year, the College Board reports that the average cost (tuition, fees, room, and board) of a public four-year college or university is over $27,000. $ for in-state students and nearly $56,000. for private school students.

But the 529 plans are no longer just about higher education. In recent years, the rules governing 529 plans have changed, so they can now be used for:

• K-12 tuition (up to $10,000 per student, per year),

• Apprenticeship programs registered with the U.S. Department of Labor, and

• Student Loans ($10,000 lifetime limit for student loan repayments per 529 Plan beneficiary and an additional $10,000 for each of the beneficiary’s siblings.)

And soon, a major change will affect the relationship between the 529 plans owned by grandparents and the financial aid granted to their grandchildren. Families applying for aid were not required to report account 529 assets belonging to the grandparents on the Free Application for Federal Student Aid (FAFSA). However, under the previous rules, you had to report withdrawals from plans held by grandparents as untaxed student income, which could reduce eligibility for assistance by up to 50% of the cash amount received. .

But that changes for FAFSA 2024-25, which won’t require students to report cash support, including money taken from a 529 plan owned by grandparents. Instead, the amount of a student’s total income will be reported directly from federal tax returns. This means that a grandparent-owned 529 plan will have no effect on eligibility for need-based financial assistance. This benefit for families is already here, as 2022 will be used as the base year for the 2024-2025 FAFSA, so any withdrawals made in 2022, and also in the future, will not need to be reported as student income.

With this change, families will now have more options on using 529 plans without compromising financial assistance. You can generally withdraw any amount from all 529 plans for higher education expenses, but only qualified withdrawals — those used for typical education-related expenses — will be exempt from tax. The earnings portion of non-qualified withdrawals is taxable and could also result in a 10% penalty.

Given the new rules affecting a grandparent-owned 529 plan, you should consult with a financial professional to determine how this plan may work with other strategies to help cover educational expenses while not harming the progress you want. do on other important goals, like a comfortable retirement.

In any case, consider looking into a 529 plan — it was already a great education funding tool, and now it can provide even more options for your family.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor. Edward Jones, Member SIPC

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