Should You Be Using a Health Savings Account?
A Health Savings Account allows you to set aside pre-tax money to pay for qualified medical expenses like doctor visits or prescriptions.
Watching your child earn a college degree is a proud moment for any parent. It also marks another great moment, that being no more tuition bills. But after all the saving and planning you have done, what if there is still money left over in your child’s 529 plan? Fortunately, you have plenty of options. Here is a list of strategies to make the most of those surplus education savings.
If your newly minted graduate is pursuing a higher degree, that is an easy way to spend down the balance in their 529 plan. These funds can be used to cover the same types of qualified educational expenses for graduate programs.
If grad school is not in your child’s future, the most straightforward option for surplus funds is to assign the 529 account to a new beneficiary. You can change beneficiaries with no penalties or tax consequences, but the person must be related to the original beneficiary by blood, marriage or adoption. That definition is broader than it sounds. For example, it includes in-laws, first cousins, first cousins’ spouses and stepparents. You can even name yourself as the new beneficiary and spend the funds on your own continued education.
If your graduate has taken on student loan debt, you can use 529 funds to help pay it down, subject to a lifetime limit of $10,000. You can also use up to $10,000 per sibling to repay their loans, which you can do without changing the beneficiary.
A few things to bear in mind. Most, but not all, student loans qualify. Private student loans must meet several criteria to be included in the program. For example, they must have been used solely for qualified education expenses for a degree or certificate program at an institution eligible for Title IV federal student aid. And they cannot be personal loans from a family member or a loan from a retirement plan.
Also, 529 plans are run by states, and their rules do not always align perfectly with federal legislation. We can help you check your 529 to see whether withdrawals for student loan payments will trigger any state tax penalties.
The SECURE 2.0 Act of 2022 added a brand-new option for unused 529 funds. If your 529 plan is at least 15 years old, you can transfer up to $35,000 into a Roth IRA in the beneficiary’s name with no taxes or penalties.
The biggest limitation with this option is that rollovers are subject to the annual $7,000 Roth contribution limit. (If the beneficiary is 50 or older, that amount rises to $8,000.) You also cannot roll over more than the income earned by the beneficiary in that tax year. Any other contributions made to your beneficiary’s traditional or Roth IRA will reduce the amount you can roll over that year.
If you spend 529 funds on nonqualified expenses, you will be charged federal income tax and a 10% penalty on the earnings portion of your withdrawal. While doing so is not always ideal, it is an option. And sometimes, it may be the best one. For example, if you face a pressing financial need and your only other choice is to take on high-interest debt, paying the taxes and penalties on a nonqualified 529 withdrawal may be less expensive in the long run.
It is also possible that the earnings portion is small enough to render the penalty insignificant. Let’s say you had $500 dollars left in the account, with contributions accounting for $420. In that case, only $80 would be subject to taxes and penalties. You might decide it is worth taking the hit to be able to close the account and move on.
The bottom line is that 529 college savings plans have more flexibility than you might think.
This post was written and first distributed by The Writing Company.
DISCLAIMER
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
A Health Savings Account allows you to set aside pre-tax money to pay for qualified medical expenses like doctor visits or prescriptions.
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