Getting Around the College 529 Plan Spending Limits

For those who have hopes of a child or grandchild attending college in the future, a 529 college savings plan can be one way to set aside funds in a tax-advantaged manner now, while also using the money tax- and penalty-free for qualified expenses down the road.

But everyone knows that one of the few constants in life is change. So what happens to the money in a 529 college savings plan if the child / beneficiary decides not to pursue higher education in the future?

How the Money in a College 529 Plan Must Be Used

The money that is inside of a 529 college savings plan must be used only for paying expenses related to college or other post-secondary training institutions – and not even all of these expenses qualify for tax-free withdrawal.

Costs that do qualify typically include the following:

  • Tuition and fees
  • Textbooks – but only those that are required reading for the student’s course work.
  • Computers and related equipment – provided that these items are primarily used for the student’s school-related assignments.
  • Room and board – within certain guidelines. In this case, the amount of qualifying expenses cannot exceed the greater of: 1) The allowance for room and board that is included in the institution’s cost of attendance for the federal financial aid calculations, or 2) The actual amount that is charged if the student resides in a housing facility that is operated by the school. (Therefore, if the student resides off campus in a facility that is not owned and / or operated by the institution, then their living expenses may not be claimed).

In any case, it is required that 529 plan spending be reported to the IRS, so keeping careful records of all related expenses is important.


Other 529 Plan Limitations

In addition to the rules regarding how money in a 529 plan must be spent, there are some additional limitations that people need to be mindful of. For example, even though the IRS does not specify an exact dollar amount for annual contribution limits (as they do with IRAs), if an investor deposits more than the amount of the annual gift tax exclusion – which in 2017 is $14,000 per recipient – then the excess dollar amount must be reported on the donor’s tax return. (And, because there is no joint gift tax return, if a donor and their spouse each contribute to the plan, then each spouse will need to file separately).

In addition, there are also certain limits on how much money can actually be in the 529 plan’s account. For example, under federal law, a 529 college savings plan’s overall balance may not exceed the anticipated cost of the recipient’s higher education costs.

What exactly does this mean?

In this case, while the dollar figure varies from state to state, the total balance maximum ranges between $235,000 and $520,000 – which represents the amount that a state believes to be the full cost of a student attending a college or university. (This amount is inclusive of room and board, as well as textbooks).

If the balance of the account exceeds the state’s dollar figure, the money is allowed to remain in the 529 plan without incurring a penalty, however, no more contributions may be made into the plan (unless, due to a market downturn, the amount of the balance drops below the maximum figure).


A College Savings Alternative with Added Benefits

Many parents, grandparents, and other donors are learning that, given the many limitations of college 529 plans, it can make sense to use other alternatives when saving for a child’s future education. One of these options is cash value life insurance.

One key benefit is that both whole and universal life insurance cash values will provide guaranteed returns – and the money inside of these policies is also allowed to grow tax-deferred. So, over time, these funds can grow and compound exponentially. This can be particularly beneficial if the child / beneficiary is young when the policy is initially purchased.

With a life insurance policy, it doesn’t matter how the cash is used. In this case, should the child / beneficiary opt not to attend college (or not to finish), then the cash from the policy can be used for any number of other needs, such as the down payment on a house, funding for a new business, or even for the child’s own future retirement.

Using life insurance can also limit the risk to college funding should something happen to the donor. For instance, if the donor dies unexpectedly, funds will still be available through the policy’s death benefit – and these funds are received income-tax free to the beneficiary.


Presenting Your Clients with a 529 Plan Alternative

Showing your clients how they can use life insurance to save for a loved one’s college – which can open up a whole array of additional options, and ensure that money will be there even if the donor passes away – can provide them with current and future financial security.

If you’re interested in learning how thousands of other insurance professionals are using these exact strategies in order to generate a nice living, while also providing their clients with peace of mind call our support team toll free at 1-800-643-6143.



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Brian J. Kay, Executive Director, Leads4Insurance
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