11/27/2023 0 Comments Taxes on 529 withdrawalsThink carefully about how you invest your savings. "With appropriate, age-based investments, the objective is to grow the assets while maintaining an age-appropriate balance between risk and return." "Whatever age-based portfolio you choose, the first step in the process is defining the investment objective," says Heather Zakian, Vice President, Investment Strategist, for the Fidelity-managed 529 plans. Typically, plans allow you to change your investment options twice each calendar year or if you change beneficiaries. For example, say the original child for whom the account was set up chooses not to go to college-or doesn't use all the money in the account-the account owner can then transfer the unused money to another named beneficiary.Įach 529 savings plan offers its own range of investment options, which might include age-based strategies conservative, moderate, and aggressive portfolios or even a mix of funds from which you can build your own portfolio. Not only does this oversight keep the child from spending the money on something other than college, it allows the account owner to transfer the money to another beneficiary (e.g., a family member of the original beneficiary) for any reason. Unlike a custodial account that eventually transfers ownership to the child, with a 529 savings plan, the account owner (not the child) calls the shots on how and when to spend the money. Control the money and choose among many investment options 4 The SECURE Act made both changes retroactive, so any 529 distributions for apprenticeships or student loans made after December 31, 2018, are tax-free under the new law.Ĭ. Additionally, 529 beneficiaries can withdraw tax-free distributions up to $10,000 (lifetime) to repay student loans. "This lower rate means that every dollar saved in a 529 college savings plan can go a long way toward helping to pay for college without significantly affecting financial aid for the student," says Tony Durkan, vice president, Head of 529 Relationship Management at Fidelity Investments.įollowing the SECURE Act’s enactment in January 2020, 529 beneficiaries can pay for qualified expenses related to apprenticeships 3 with tax-free distributions. That's far lower than the potential 20% rate that is assessed on student assets, such as assets in an UGMA/UTMA (custodial) account. This means that only up to 5.6% of the 529 assets are included in the expected family contribution (EFC) that is calculated during the federal financial aid process. But, because 529 savings plan assets are considered parental assets, they are factored into federal financial aid formulas at a maximum rate of about 5.6%. Many families worry that saving for college will hurt their chances of receiving financial aid.
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