College Planning - Coastal Wealth Management.

Planning for College

A college education is one of the greatest gifts you can give a child or grandchild. While it’s best to start saving at a young age, we can help parents of any age student develop a college planning strategy.

Understanding the many types of accounts used to save for college costs is very important. Coastal Wealth Management, available through CFS*, can help you evaluate which account is best for your situation.

We will evaluate:

How much should you be saving to reach your college goal?
What account(s) should you use to maximize your financial aid availability?
What accounts offer the investments you want to use?
What are the tax benefits of the different accounts?

There are numerous ways to save for college. Some options are tax-advantaged and offer design flexibility.

529 Plans
Coverdell Education Savings Accounts
Custodial Accounts (Uniform Transfers to Minors Act – UTMA)
Investment accounts owned by the parent/grandparent/guardian
Cash Value Life Insurance

Use our college savings calculator to determine how much you should be saving for college on a regular basis.

Net Price Calculators can help gauge college affordability.

New College Cost Data for 2021-2022 Academic Year

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Saving for College and Retirement

Tax-Advantaged College Savings

Estimating the Costs of Attending College

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College Savings Options For Your Children

Frequently Asked Questions

What is the college inflation rate?

The college inflation rate refers to the annual increase in college tuition and fees, similar to the way the general inflation rate refers to the annual increase in the cost of living. The college inflation rate is typically in the range of 3% to 6% for both private and public colleges.

For parents trying to keep up with their child’s college fund, it’s important to choose investments for college savings that keep pace with college inflation. You can use the college inflation rate for a given year or the average rate of inflation over the past decade to help project college costs in the future. Be aware, however, that the more years your child has to go until college, the greater likelihood that your cost estimate will need to be revised at a later date.
What expenses are included in the annual cost of college?
To most parents, the annual cost of college simply refers to tuition and room and board. To the federal government, however, the annual cost of college means the cost of attendance. Twice per year, the federal government calculates the cost of attendance for each college, adjusts the figure for inflation, and, if your child is applying for financial aid, uses this number to determine your child’s financial need.

Five categories of expenses are used to determine the cost of attendance at a particular college:

Tuition and fees: Same for all students at private colleges but can vary at public colleges, depending on whether the student is in-state or out-of-state

Books and supplies: Can vary by student, depending on your child’s courses and his or her requirements

Room and board: Can vary by student, depending on the meal plan your child selects and whether he or she lives on or off campus

Transportation: Can vary greatly by student, depending on where your child lives in relation to the school

Personal expenses: Can vary by student (e.g., health insurance, spending money, clothing)

In the last four categories, the federal government sets a monetary figure even though the exact expenses incurred will depend on the individual student. Thus, depending on these variables, your child’s actual cost may be slightly higher or lower than the cost used for official purposes like financial aid determinations.

If you’re interested in obtaining the monetary amount allotted to each category for a particular college, contact that college directly.
Should I use my 401(k) to fund my child's college education?

You can, but it isn’t your best option. Your 401(k) plan should be dedicated primarily to your retirement.

There are two primary drawbacks to using your 401(k) for college funding. First, if you withdraw funds from your 401(k) before you are 59½, you may owe a 10 percent premature distribution penalty on the withdrawal. This penalty is in addition to income taxes you will owe on the withdrawal. Second, frequent dips into your 401(k) reduce the amount of money you ultimately have available to reap the benefits of compounding and tax deferral. This, in turn, reduces the overall funds for your retirement.

If you really need to use your 401(k) to pay for college, a better option might be to borrow from it if your plan allows loans. Plan loans are not taxed or penalized, as long as you repay the funds within a specified time period. But make sure you compare the cost of borrowing college funds from your plan with other finance options. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.

If you want to save for college in a retirement vehicle, consider using a traditional IRA or Roth IRA instead. With these IRAs, you will not owe the 10 percent premature distribution penalty on withdrawals you make before age 59½, as long as the money is used to pay your child’s qualified college expenses. If you have some time to plan your child’s college fund, you might consider a Coverdell education savings account or a 529 plan established and maintained by a state or eligible educational institution. Each of these vehicles is specifically geared to college investors and offers numerous tax advantages.
Can I invest in any state's 529 plan, or am I limited to my own state's plan?

529 college savings plans are typically open to residents of any state, while 529 prepaid tuition plans are typically limited to state residents. States that let nonresidents join their 529 college savings plan may have different rules for residents and nonresidents (such as higher annual fees and higher minimum contribution requirements for nonresidents). And keep in mind that if you join a different state’s 529 plan (either college savings plan or prepaid tuition plan), you won’t enjoy any tax benefits offered by that state–your own state’s tax laws would apply.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can more than one 529 account be opened for the same child?

Yes. You (or anyone else) can open multiple 529 accounts for the same beneficiary, as long as you do so under different 529 plans (college savings plan or prepaid tuition plan). For instance, you could open college savings plan accounts with State A and State B for the same beneficiary, or you could open a college savings plan account and a prepaid tuition plan account with State A for the same beneficiary. But you can’t open two college savings plan accounts in State A for the same beneficiary.

Also, keep in mind that if you do open multiple 529 accounts for the same beneficiary, each plan has a limit, and contributions can’t be made after the limit is reached. Some states consider the accounts in other states to determine if the limit has been reached. For these states, the total balance of all plans (in all states) cannot exceed the current year’s maximum contribution amount.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
What happens if I open a 529 plan in one state and then move to another state?

Essentially nothing. You can leave the account assets in your former state’s plan with no penalty. Alternatively, you can roll the assets over from your old state’s 529 plan to your new state’s plan if both plans allow it. Check the details of each plan carefully before you start any transfers.

You can keep the same beneficiary when you do the rollover. But the rollover does bring with it a restriction: You can roll the assets over from one 529 plan to another only once every 12 months. If you want to immediately get out of the 529 plan you’re in now and avoid this restriction, you’ll need to change the account beneficiary when you request the transfer.

Some 529 plans also require a minimum time period, such as one year, before withdrawals (including rollovers) can be made from an account for any reason. Again, check both plans to make sure there are no withdrawal limitations.

One advantage of a rollover is that you can reallocate your 529 funds to a different investment portfolio (or portfolios) when you join the new plan. So, you might be able to invest more or less aggressively, depending on your personal situation and market factors.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can I roll over my existing 529 account to another state's 529 plan without penalty?

Yes. You can do a rollover (without changing the designated beneficiary) once every 12 months without incurring a penalty. This might be attractive if you move to another state or if you simply prefer the investment options that a different state offers. However, if you want to roll over your account more than once a year, you’ll need to designate a new beneficiary (you can change it back later) to avoid a penalty.

You must complete the rollover within 60 days in order to avoid a penalty. If you wish to roll over your account, be sure to check your plan’s specific requirements.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can contributions to a 529 plan be directly debited from my checkin account?

It depends on the plan. In general, many plans will allow you to set up an automatic debit arrangement to make contributions to your 529 account. But the only way to know for sure is to ask your plan administrators.

If your plan offers this feature, it’s generally very easy to set up–you simply complete the required paperwork with your 529 plan. You’ll typically have to provide your bank account information and indicate the desired amount and frequency of your contributions (e.g., $100 a month). Then you can sit back, because the money will be automatically deducted from your bank account and invested in your 529 account–you won’t have to worry about sending in a check every time you want to make a contribution. That makes these arrangements a convenient and reliable way to save for your child’s education, especially if you don’t consider yourself a disciplined saver.

If you set yourself up for automatic bank account debits, be aware that the contribution limits and minimums that your 529 plan imposes will still apply (though some plans may waive the minimum deposit needed to open an account if you sign up for automatic debits). And be sure to find out if you’ll be subject to any special charges (or discounts, for that matter) if you opt for automatic debits.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
I know I can borrow against my 401(k), but can I borrow against the value of my 529 account?

No. Section 529 plans do not allow loans against an account’s assets. You can, however, make withdrawals from the plan to pay for qualified educational expenses. Keep in mind, though, that nonqualified withdrawals (i.e., funds not used for qualified higher education expenses) are subject to a federal penalty tax of 10 percent on the earnings portion of the withdrawal (a state penalty may apply as well). You may also owe federal, and in some cases state, income taxes on the earnings portion of a nonqualified withdrawal.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can I transfer my child's UGMA/UTMA custodial account to a 529 plan?

There are two ways to explore this rather tricky question. The first way is to examine whether it’s possible to liquidate an UGMA/UTMA account and invest the proceeds in a 529 plan. The second way is to see whether it’s possible to transfer existing UGMA/UTMA assets to a 529 plan.

Before looking at these two questions, it’s helpful to know some basics about UGMA/UTMA (which, by the way, stands for Uniform Gifts (Transfers) to Minors Act) accounts. All gifts to an UGMA/UTMA account are considered irrevocable gifts to the child named as the beneficiary of the account. Once a gift is made, the custodian (usually the parent) can withdraw funds only if the money is used for the child’s benefit. This may include things like private elementary or secondary school, summer camp, a computer, violin lessons, a secondhand car, and so on.

This requirement that the money must be used for the child’s benefit also includes making an investment in a 529 plan (college savings plan or prepaid tuition plan), as long as the 529 plan is established for the same beneficiary as the custodial account. You can liquidate the investments in the UGMA/UTMA account and invest all of the proceeds in a 529 plan (though you may incur tax liability). The key is that the proceeds must be used for the benefit of the same beneficiary. So, you wouldn’t be able to invest the UGMA/UTMA proceeds in a 529 plan established for a different beneficiary.

The question of keeping your child’s UGMA/UTMA account intact and transferring the assets to a 529 plan is more difficult. Whether this is allowed usually depends on the rules of the 529 plan. In either case–liquidating the UGMA/UTMA account or transferring the assets in the UGMA/UTMA account–there are important things to keep in mind.

First, federal law requires that all contributions to 529 plans be made in cash. Therefore, all assets in an UGMA/UTMA account would first need to be converted to cash if they were not already (e.g., stocks, real estate, certificates of deposit). So, even if the 529 plan accepts the transfer of assets, you will be required to turn those assets into cash. Keep in mind that this may trigger income tax liability.

Second, because the cash will now be held within the UGMA/UTMA account, which, in turn, is in the 529 plan (sort of a cup within a bucket), you are still bound by the rules of UGMA/UTMA accounts. This means that you can’t change the beneficiary of the 529 plan, because gifts to an UGMA/UTMA account are considered irrevocable gifts to the beneficiary. In addition, you must relinquish control of the 529 plan to your child when he or she reaches the age of majority (18 or 21, depending on state law), because this is what happens with an UGMA/UTMA account. And finally, all future contributions you make to the 529 plan will be treated as UGMA/UTMA contributions, meaning that they will be considered irrevocable gifts to the beneficiary. Third, some 529 plans might require that you name the child as the owner (as well as the beneficiary) of the 529 plan after UGMA/UTMA funds are contributed.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
How does a 529 plan compare with investing in a mutual money left over in the 529 account?

You basically have three options: withdraw the money, leave the account intact for possible graduate school, or change the beneficiary.

If you withdraw the money that is left over in your 529 account and don’t use it to pay for the beneficiary’s qualified higher education expenses, you’ll have to pay a 10% federal penalty tax on the earnings portion of the withdrawal (a state penalty may apply as well). You may also have to pay federal, and in some cases state, income taxes on the earnings portion of the withdrawal.

Another option is to leave the account intact in case your child decides to attend graduate school in the future. If you choose this option, contact the plan to see if they have a time limit on when funds must be used.

Finally, you might consider changing the beneficiary. All 529 plans allow the account owner to change the beneficiary, though depending on the plan, there may be a fee for this service. As long as the new beneficiary is a qualifying family member, no taxes or penalty will be due. If you’d like to join a new 529 plan, you may be able to receive a “rollover” distribution from your existing 529 plan and contribute the proceeds within 60 days to a new 529 plan with the new beneficiary. Check with your existing 529 plan for more details.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Should I save for college in my name or my child's name?

There are three potential drawbacks to saving in your child’s name–the kiddie tax, federal financial aid rules, and control issues.

First, the kiddie tax. At one time, saving money in a child’s name was recommended because of the tax saving opportunities that resulted when children were taxed at their own rate. However, Congress partially closed this loophole some years ago with passage of special rules commonly referred to as the “kiddie tax.” The kiddie tax makes a child’s unearned investment income over a certain amount subject to tax at the parents’ tax rate. Currently, this amount is $2,100 (the first $1,050 is tax free and the next $1,050 is taxed at the child’s rate). The kiddie tax rules significantly reduce the tax savings potential of a child holding assets in his or her name.

The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support. To lessen the impact of the kiddie tax, choose tax-free or tax-deferred investments in which the annual expected income does not exceed the threshold amount of $2,100.

Second, the federal financial aid rules have a more negative impact on child assets than parent assets. Under the current federal aid formula, a child must contribute 20% of his or her assets to college costs each year, whereas parents must contribute 5.6% of their assets each year. So $10,000 in your child’s bank account would equal a $2,000 contribution from your child, but that same

$10,000 in your bank account would equal a $560 contribution from you.

The more assets a child has, the more he or she will be expected to contribute to college costs, and the less financial aid he or she will receive, because the financial need is less. However, keep in mind that obtaining less financial aid is not necessarily a bad thing. The average financial aid package consists mostly of loans, so by paying more up front, chances are you or your child will just incur less debt, as opposed to losing grants and scholarships (which do not have to be repaid).

Finally, there is the control issue. Many parents open a custodial account for their child (UGMA or UTMA) to save for college. However, when the child reaches the age of majority (18 or 21, depending on the state), he or she gets full control over the money in the account and can use the money for anything–college, or perhaps a backpacking trip to Europe. Some parents aren’t willing to relinquish this control to their child.

For all these reasons, it’s generally recommended that parents save for college in their own names, not their children’s names.
Help! My child is only two years away from college and we haven't saved much. What should we do?

Your late start means you’ve missed most of the best opportunities to grow the money you have. With only two years until your child starts college, you’ll need to refine the college selection process, accumulate enough of a down payment for the early college bills, and establish a savings plan for the later college years. Here are some constructive steps you can take.

First, help your child investigate schools that provide a good value. Some less expensive state universities and second-tier private colleges may offer better programs than their more expensive private counterparts. Think creatively. Your child could attend a nearby school and live at home for a year or two to save money on room and board. He or she could attend a community college for two years and then transfer to a private four-year college. Or, your child could consider cooperative education, where semesters of academic work alternate with semesters of paid work. If your finances are severely limited, your child might consider taking a year off before starting college.

Second, learn all you can about financial aid. Do a dry run through the federal government’s financial aid application to determine whether your child is likely to qualify for financial aid, and, if so, for how much. When you’ve zeroed in on a few colleges, examine their financial aid statistics. For example, what percentage of students receive financial aid? What percentage of the average package consists of loans? What percentage of a student’s financial need is generally met–100%? 75%? Does the college offer merit scholarships? You can also use a net price calculator on a college’s website to get an idea of how much aid your child might receive at a particular college based on your financial information.

Third, start investigating potential scholarships. There are a number of websites where your child can type in his or her interests, abilities, and goals to obtain a list of relevant scholarships. However, outside scholarships generally make up only a small portion of a student’s overall aid package, so it’s very important that this search be made in addition to, not in place of, the quest for federal and college-sponsored financial aid.

Fourth, examine any current financial resources that you can draw on for the early college bills. Do you have savings accounts, stocks, mutual funds, or cash value life insurance? Can you pay a portion of the tuition bills from current income? Can you increase the family income by getting a second job or having a previously stay-at-home spouse return to the work force? If you’re still short, you’ll need to investigate a personal loan, a home equity loan, or the federally sponsored PLUS Loan, which is tailored especially to parents. In other cases, you may need to tap your retirement accounts, though this is generally recommended only as a last resort.

Finally, you’ll need to start earmarking a portion of your current income for college bills that won’t come due until four or five years, when your child is a junior or senior in college. Because you’ll need the money relatively soon, you should avoid high-risk investments. Instead, choose a low-risk, stable investment, such as a certificate of deposit that is timed to mature when you need it, or a money market mutual fund.
Are 529 college savings plans a good way to save for college?

Yes, they can be an excellent way to save for college. College savings plans are established by states and typically managed by an experienced financial institution designated by the state. Each plan has slightly different features.

A 529 college savings plan lets you save money for college in an individual investment account that offers federal tax advantages. You (or anyone else) open an account in your child’s name and thereafter contribute as much money as you wish, subject to the plan’s limit.

The state’s selected money manager takes your contribution and invests it in one or more of the plan’s pre-established investment portfolios, which typically consist of mutual funds. Some plans automatically place your contribution in a portfolio that’s tailored to the age of your child. (The younger your child, the more aggressive the percentage of stocks. As your child grows older, the portfolio gradually shifts to more conservative investments.) Other plans let you choose the portfolio you want at the time you join the plan, without regard to your child’s age. This lets you take into account your risk tolerance and other factors that may be important to you.

College savings plans are popular because they combine many desirable tax features with the ability to use the money at any accredited college in the country or abroad. Your contributions grow tax deferred, and if withdrawals are used to pay the beneficiary’s qualified education expenses, the earnings are completely free from income tax at the federal level. Many states also add their own tax benefits, such as tax deductions for contributions and exemption of the earnings from state income tax.

However, if a withdrawal isn’t used to pay the beneficiary’s qualified education expenses (known as a nonqualified withdrawal), the earnings portion is subject to a 10 percent federal penalty and is taxed as income at the rate of the person who receives the withdrawal (a state penalty may also apply).

There are no income limits that determine whether you are eligible to open a college savings plan account–everyone is eligible. And if your child decides not to go to college or gets a full scholarship, the money in the plan can be transferred to a qualified family member without penalty.

But investment returns aren’t guaranteed. If your investment portfolio performs poorly, you’re still bound by the investment decisions of the plan’s money manager, unless the plan lets you change the investment strategy for your existing contributions, which it may do twice per calendar year. College savings plans are also free to let you change your investment option for future contributions. If your plan doesn’t provide this flexibility, then you are allowed by federal law to roll over your college savings plan account to a different 529 plan (college savings plan or prepaid tuition plan) without penalty once every 12 months.

You are not limited to your own state’s college savings plan. Most states allow anyone to participate in their plan. You may also participate in the college savings plan of more than one state.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Is there an income limit on who can open a 529 account?

No. There is no income limit that controls who is eligible to open or contribute to a 529 plan account.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
How do I enroll in a state's 529 plan?

Contact the plan administrator that runs the 529 plan that you want to join. (All plans have websites and toll-free numbers to help you get the information you need.) Plan administrators may be state agencies or companies established solely for the purpose of running a 529 plan, or they may be investment firms. In any case, the plan administrator operates under the authority of each state government, such as the state treasury department. The plan administrator will send you a packet of information that includes enrollment materials, along with a program description. Read the information thoroughly and make sure you understand the plan’s rules before you enroll.

In addition, be sure to check the enrollment period for the plan. Many states offer open enrollment, meaning you can join the plan at any time. Other states have shortened enrollment periods, such as October to January.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Do 529 plan expenses vary among states?

Yes. There are great differences in the amount and types of fees and expenses that 529 plans charge in various states. Pay close attention to those charges when choosing a plan. In some cases, fees and expenses can significantly affect your account’s return.

Fees commonly charged include enrollment fees, annual account maintenance fees, expenses charged for making changes to your account, and investment management fees (for a college savings account). Some fees and expenses apply only to

out-of-state residents, and some fees may be higher for nonresidents. Some fees may be waived altogether under certain circumstances (e.g., if you set up a payroll deduction plan for automatic contributions to 529 plan).

Keep in mind that plans that contain the lowest fees and expenses aren’t necessarily the best plans. Be sure to weigh these charges along with other factors, including investment performance and program management. In addition, before investing in a 529 plan outside of your state of residency, find out what state tax benefits (if any) you might lose if you do so. Your state may offer tax benefits only to residents who invest in their in-state 529 plan.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can I move funds from my Coverdell education savings account to a 529 plan?

Generally, yes. You may withdraw funds from your Coverdell education savings account and not pay federal income taxes on the withdrawal if you use the funds for qualified education expenses. The rules for Coverdell ESAs consider a rollover contribution to a 529 plan (for the same person who is the beneficiary of the Coverdell ESA) as a qualified education expense. So, the transfer will usually be a nontaxable transfer from the Coverdell ESA to the 529 plan. Such a transfer may produce state income tax advantages.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can I contribute to a 529 account and a Coverdell ESA in the same year for the same beneficiary?

Yes. You can fund a Coverdell education savings account and a 529 account in the same year for the same beneficiary without giving rise to penalties. There is a small annual contribution limit for Coverdell accounts, while most 529 plans have lifetime contribution limits of at least $300,000.

And keep in mind that, unlike a 529 plan, your ability to contribute to a Coverdell ESA depends on your income level.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
Can 529 funds be used for general living expenses while at college?

No. The federal definition of “qualified education expenses” that most colleges use doesn’t include general living expenses (e.g., phone charges, transportation). To be covered, expenses must be for something required for enrollment and attendance (e.g., books, a computer), and most living expenses don’t fit into this category. But gray areas exist. For instance, the grocery expenses of students living off-campus may qualify as board charges, so you should address questions like this to your plan administrator. Withdrawals for nonqualified expenses will generally be subject to income tax and an additional 10 percent federal penalty tax on earnings.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
What happens if my child finishes college and there is money left over in the 529 account?

You basically have three options: withdraw the money, leave the account intact for possible graduate school, or change the beneficiary.

If you withdraw the money that is left over in your 529 account and don’t use it to pay for the beneficiary’s qualified higher education expenses, you’ll have to pay a 10% federal penalty tax on the earnings portion of the withdrawal (a state penalty may apply as well). You may also have to pay federal, and in some cases state, income taxes on the earnings portion of the withdrawal.

Another option is to leave the account intact in case your child decides to attend graduate school in the future. If you choose this option, contact the plan to see if they have a time limit on when funds must be used.

Finally, you might consider changing the beneficiary. All 529 plans allow the account owner to change the beneficiary, though depending on the plan, there may be a fee for this service. As long as the new beneficiary is a qualifying family member, no taxes or penalty will be due. If you’d like to join a new 529 plan, you may be able to receive a “rollover” distribution from your existing 529 plan and contribute the proceeds within 60 days to a new 529 plan with the new beneficiary. Check with your existing 529 plan for more details.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
My child will be going to college next year and using 529 funds: what do I need to do?
Now would be a good time to review the terms, conditions, and procedures of your 529 plan. Not all plans are alike. So don’t assume that the procedures your sister follows for her Iowa college savings plan will be the same for your Rhode Island college savings plan (or prepaid tuition plan). At a minimum, you should investigate the following issues.

First, bear in mind that you’ll probably have to notify the 529 plan administrator that your child will be making a withdrawal for college expenses. In most prepaid tuition plans, the payout procedures are standardized. For example, some prepaid tuition plans require that all plan withdrawals must occur within 10 years of the time the beneficiary starts college. College savings plan procedures can differ considerably from plan to plan, though. No matter what your plan, consider the following questions:

What education expenses does the plan consider “qualified”?

When must you notify the plan administrator that you wish to withdraw funds from the plan?

How do you document that the withdrawal has been used to pay qualified education expenses? How soon must you provide this documentation?

Are college expenses paid directly from the plan to the educational institution, or is the beneficiary reimbursed for expenses? How long will reimbursement take?

Is a minimum withdrawal amount required, or is there a limit on the number of withdrawals per semester?

Does the state’s definition of “eligible educational institution” differ from the federal definition, and does your child’s college satisfy the definition?

Does the plan require a minimum level of attendance (e.g., half-time enrollment) for qualified expenses other than room and board?

Second, make sure you understand how a qualified withdrawal from a 529 plan will affect your state income taxes. And remember–you’re entitled only to the state tax benefits (if any) offered by the state in which you reside.

Third, explore how a withdrawal from a 529 plan will affect your child’s eligibility for financial aid from the college as well as federal financial aid.

And finally, investigate how to coordinate a 529 plan withdrawal with the American Opportunity credit (Hope credit) and Lifetime Learning credit (which you may be able to claim on your federal income tax return) to maximize your income tax benefit. Although you may claim one of these education credits in the same year you withdraw funds from a 529 plan, your 529 plan withdrawal may not be completely tax free on your federal income tax return that year.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Coastal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

CFS representatives do not provide tax or legal guidance. For such guidance please consult with a qualified professional. Information shown is for general illustration purposes and does not predict or depict the performance of any investment or strategy. Past performance does not guarantee future results.

Planning for College

New College Cost Data for 2021-2022 Academic Year

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College Savings Options For Your Children

Frequently Asked Questions

What is the college inflation rate?

What expenses are included in the annual cost of college?

Should I use my 401(k) to fund my child's college education?

Can I invest in any state's 529 plan, or am I limited to my own state's plan?

Can more than one 529 account be opened for the same child?

What happens if I open a 529 plan in one state and then move to another state?

Can I roll over my existing 529 account to another state's 529 plan without penalty?

Can contributions to a 529 plan be directly debited from my checkin account?

I know I can borrow against my 401(k), but can I borrow against the value of my 529 account?

Can I transfer my child's UGMA/UTMA custodial account to a 529 plan?

How does a 529 plan compare with investing in a mutual money left over in the 529 account?

Should I save for college in my name or my child's name?

Help! My child is only two years away from college and we haven't saved much. What should we do?

Are 529 college savings plans a good way to save for college?

Is there an income limit on who can open a 529 account?

How do I enroll in a state's 529 plan?

Do 529 plan expenses vary among states?

Can I move funds from my Coverdell education savings account to a 529 plan?

Can I contribute to a 529 account and a Coverdell ESA in the same year for the same beneficiary?

Can 529 funds be used for general living expenses while at college?

What happens if my child finishes college and there is money left over in the 529 account?

My child will be going to college next year and using 529 funds: what do I need to do?

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Or call us at 919-882-6655