Parents looking to save for college have long turned to 529 college savings plans as a tax-advantaged way to put away money for higher education.
According to Sallie Mae’s 2015 How America Saves for College survey, while 89% of parents believe college is an investment in their child’s future, only 27% of savers are using a 529 college savings plan. What’s more, 48% use a traditional savings account, despite the low yield on this type of savings vehicle in today’s current interest rate environment. 529 plans are attractive because parents can invest money in the stock market and, hopefully, grow their savings without facing a taxable event when they use the money for qualified higher education expenses such as tuition, books and room and board.
One of the biggest and most helpful changes to 529 plans for this year is what can now be deducted as a college expense.
According to Rick Castellano, a spokesman at Sallie Mae, in the past, parents weren’t able to deduct computers, tablets and other electronic devices as a qualified education expense, but now they can. When the rules were passed for 529s back some twenty years ago, computer equipment wasn’t found in every classroom and attached to every college student’s hip. Now, it’s almost a requirement on college campuses around the country.
In addition to giving families greater flexibility in terms of what their 529 savings can get them, the government has made it easier for students to take off from school without being penalized. Up until Jan. 1, students who used money from a 529 college savings plan and for whatever reason had to drop out of school with a full refund weren’t allowed to redeposit the money into the 529 savings plan. That meant that if an illness, family emergency or other circumstance prevented the student from attending college, the money that initially went to pay for college would be treated as income and taxed accordingly. “529s treated it as once you get the money, it is a distribution and is a completed transaction,” says Betty Lochner, chair of the College Savings Plans Network.
That all changes this year. Now, students who have to withdraw from college for whatever reason and get their tuition back can reinvest it into the 529 account and avoid a tax bill.
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