While prepaid tuition plans are restricted for use with costs specific to the colleges or universities which sponsor the plans or in the states that sponsor the plans, withdrawals from college savings plans can generally be used at any eligible college or university. College savings plans may also be used to cover the cost of the purchase of most computer technology or related equipment and services, such as Internet access. However, if you withdraw money from a college savings plan and do not use it on an eligible college expense, you will typically be subject to income tax and an additional 10% federal tax penalty on any earnings. The distribution may also be subject to state tax, depending on your state of residence.
In addition to college expenses, $10,000 can be used in connection with annual expenses for tuition and enrollment at an elementary, secondary public, private or religious schools.
Additional changes were made to the plans after the Congress passed the SECURE Act, which was signed on Dec. 20, 2019.
Under Section 302 of the act, plan holders can now:
- Use their 529 accounts to cover expenses related to any registered apprenticeship program attended by the beneficiary. This includes any additional costs such as fees, equipment, books, and other supplies.
- Withdraw up to $10,000 from their plan to pay down qualified student loans penalty-free—with conditions. The first is that the $10,000 maximum is a lifetime limit for a beneficiary and each sibling. This means a family with two children can take out a maximum of $20,000 to pay down their student loans. Secondly, plan holders cannot claim any student loan interest deductions paid with this money.
Contributing to a 529 plan
Anyone may set up a 529 plan and name whomever they wish as the beneficiary — a relative, a friend, or even yourself. There are no income restrictions for the contributor or the beneficiary.
Total contributions may not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. Contributions to the plan are also considered “gifts” for federal income tax purposes. Although the current amount that you can give to any one person is $16,000, you’re allowed to pre-pay up to five years’ worth of gifts to a 529 plan, or currently $80,000 without incurring the federal gift tax.
If all of the money in the 529 plan is not used, you have the option to change the beneficiary to another member of the family1 with no tax consequences. Once a year, you can roll the assets into another plan for the benefit of the same beneficiary or for the benefit of a member of the beneficiary’s family.
Setting up a 529 plan
If you’re interested in 529 plans for your children or grandchildren, the Securities and Exchange Commission website has more information. If you’d like help with your research, you may want to talk with a Thrivent financial professional. If you’re curious about other educational savings options, make sure to check out our Coverdell Education Savings Accounts (CESAs) or Uniform Transfers to Minors Act accounts (UTMAs), which you can conveniently open online.