Dollars & Sense

College and postsecondary education is no longer just for young people. There was a 43-percent jump in the number of students age 25 and older during the first decade of this century, and another 23-percent rise is expected by 2019, according to the National Center for Education Statistics. These older students face many of the same challenges as their younger classmates, including paying for the high costs of a college or graduate education. That’s why they should be aware of all their options, including the opportunity to build tax-free earnings in a 529 college savings plan.

An appealing tax-advantaged option

Section 529 of the Internal Revenue Code created qualified tuition programs that make it possible to set aside money for college without paying taxes on the earnings. (Contributions to the plans may also be deductible from your taxable state income in some states). There are no income limits on who can set up a plan, an important consideration for working adults. How much you can contribute varies depending on the plan. Distributions from the account must be used to pay for qualified higher education expenses. According to the Internal Revenue Service, these costs generally include tuition, fees and related books, supplies and equipment if required for enrollment or attendance at an eligible educational institution, as well as room and board, if at least a half-time student.

A range of choices

Distributions from your 529 account must be used at eligible, degree-granting educational institutions, including any college, university, vocational school or other postsecondary institution eligible to take part in a student-aid program administered by the Department of Education. Another advantage for older students: Distance learning programs qualify, so you don’t have to spend hours in a classroom to benefit. The money can be used for a full- or part-time program and there are no time limits on how long the account can exist or age limits on who can set one up. You can create one today and withdraw your money — and any earnings on it — tax free whenever you have qualified expenses. That means you can set aside some money now for a master’s or other program you intend to take years down the road or temporarily park your dollars for upcoming continuing education needs. If you are an adult who’s already in the workplace and you want to add to your credentials in your current field or switch careers completely, setting up a 529 plan to finance your education may be a valid option.

Setting your timeline

When will you be using the money in your 529 account? It’s useful to know that so that you can make informed decisions about the type of investment that’s best for you. It’s possible to find a variety of investment choices in 529 plans, and your decision on which to pick may depend on when you’re planning on going back to school. You may prefer a less risky investment mix if you expect to use the money soon, for example, and might be more aggressive if you have a longer timeline.

Switching beneficiaries

Since it’s possible to change the beneficiary of a 529 account, a parent, older sibling or other relative can take over an existing plan if the original beneficiary didn’t use all the assets. Bear in mind, though, that there can be serious tax consequences if you withdraw money from your 529 plan and don’t use it to pay for qualified expenses. That includes a 10-percent penalty on the earnings you withdraw from an account that is not used for qualified expenses.

Dollars & Sense is a regular column provided by the Oregon Society of CPAs

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