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Bernie Sanders and Your 529 Plan

Mar 22, 2016

What happens to your 529 plan if Bernie is elected? On Bernie’s website his plan is to make College tuition free. Under current rules the money you saved in a 529 plan can only be used for qualified higher education expenses (QHEE).  If the funds are used for anything else you incur a 10% penalty plus you pay income tax on the earnings. Currently QHEE includes tuition, fees, books, supplies, equipment, and the additional expenses of a special needs beneficiary. You cannot include the following: insurance, sports, computer, transportation costs, repayment of student loans, room and board costs in excess of the amount the school includes in its “cost of attendance” figures for federal financial aid purposes.1

Benefits: the benefit of a 529 plan vs. a nonqualified investment brokerage account is that when the money grows inside of a 529 plan you don’t pay taxes on the gains. When you pull the money out for QHEE it is a tax free withdrawal. The money is invested in mutual and/or index funds and will fluctuate with the market. It’s important to grow the money due to the current rising cost of college. If your child is younger generally it will serve you well to have a larger portion in equities and as they get closer to college you will want to consider moving your allocation more to bonds and cash.

Scholarships: if your child receives a scholarship the 10% penalty is waived. You will owe taxes on the earnings however you can take those out in your child’s name; presuming they will be in a lower tax bracket than you.

College is one of the hardest things to plan for due to some of the potential penalties and taxes on a 529 plan if you overfund them. For example, if you were originally saving for private tuition and your kid attends a public college. That’s at least going to leave you 5 figures left over in your account. Or you were saving for them to go out of state and they stay in state. Or even worse they don’t go to college at all! You can always change the beneficiary to another child if that happens. It makes it very difficult to plan with all of the variables you’re working against. Generally I suggest saving a minimal amount into a 529 plan that will at least cover the basic expenses and utilizing other vehicles if you are wishing to pay for private or out of state. And if Bernie gets elected, well there will be a lot of penalties and taxes being paid to the federal government from our 529 plans if college tuition is free. Maybe that’s his plan to pay for it!

In my next article I’ll talk about some other vehicles you might want to consider using.

Written by Tanner Fedell, Financial Advisor



Contact Tanner

Tanner R. Fedell - Independent Financial Consultant
Phone (469) 708-9260 Secure Tax (612) 256-3002
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1Avoid these 529 withdrawal traps

A 529 college savings plan is a tax-advantaged investment program designed to help pay for qualified higher education costs. Participation in a 529 plan does not guarantee that the contributions and investment returns will be adequate to cover higher education expenses. Contributors to the plan assume all investment risk, including the potential for loss of principal, and any penalties for non educational withdrawals. Your state of residence may offer state tax advantages to residents who participate in the in-state plan, subject to meeting certain conditions or requirements. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state’s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.

1439584/DOFU 3-2016



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