Going Back to School after Retirement? Save with a 529 Plan

A 529 plan is a savings account specifically designed to help pay for the cost of college. Every state in the country now offers a version of the 529 savings plan, and most states permit the plan to be transferred for use in another state or private college system. The savings account is set up by a donor for use by a beneficiary; however, the donor and the beneficiary can be the same person. Using this model, you can save for a return to college after your retirement with many tax benefits.

Tax-Deferred Growth

First, it is important to understand the contributions you make to a 529 plan are not tax deductible. If you were to apply the same funds to an IRA or 401k account, you would recognize greater savings in the short term. However, a 529 does offer the same tax-deferred growth status as other retirement accounts. This means you do not need to periodically make payments on the income your account is earning while it is active. This applies to federal income and capital gains tax. Once you withdraw the funds, tax payments may be required, but the 529 does offer a unique exemption discussed in the next paragraph.

Federal Tax-Free Expenses

Any withdrawals used to pay for qualified education expenses are free of federal taxation. This means, not only did your account grow tax free, but also you will not have to pay taxes once the money is taken out of the account to pay for college. It is important to realize that not all expenses will fall into the tax-exempt status. However, even if just a portion of the funds are exempt, you will save money using a 529 plan over other retirement plans. 

State Tax Incentives

Each state offers tax incentives to use a 529 plan. The specific incentives depend on a number of factors including the following: the state where the account was held, the state where the account was intended to be applied, the eventual state where the funds were directed and the type of school chosen. In general, the largest incentives will go to a student who has created, in a state of residence, an account that is intended for use in that state. If this student then goes on to a state school, authorized under the public state school system, the student will recognize the greatest savings. Consider the options to attend a public school in your area prior to making your selection.

Retirement Account Alternatives

If you intend to use your savings account after retirement, you have the option of selecting a retirement account instead. Both 401k and IRA accounts offer similar tax incentives for savings. One key difference is the qualifying minimum age for deduction with a retirement savings account. You will pay a 10 percent penalty to withdraw funds prior to reaching the age of 59 1/2. Therefore, if you would like to begin attending college before this age, you will lose a great deal of your savings. Upon reaching the minimum withdrawal age, you must also make mandatory withdrawals, even if you are not ready to begin your college spending yet.



Can you use a 529 college savings plan at a foreign college?



A 529 college savings plan is arranged by a particular state. While you can use your savings plan in a state other than the one you enrolled in, the program does not extend outside the boundaries of the United States. If you wish to attend a foreign university, your 529 plan will not be applicable to related expenses. Thus, you will need to find another source of funds. You may be eligible to use a loan from your 401k plan or another source of loan funds. However, restrictions may still apply based on the accreditation of the university you choose.



Can you write off your 529 contribution on your state taxes?



The vast majority of states, 34 as of 2010, offer options for tax deductible 529 contributions. You can deduct up to a given limit, similar to deducting contributions to a retirement plan. You cannot make a deduction for your federal taxes. However, the federal government does allow you to withdraw the funds tax free in the future. The tax status of a 529 account is just one of the many benefits. Other benefits include easy enrollment and safety for your funds. If you are eligible for a 529 plan, you may use the money to attend college in states other than the state where you contributed.

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