By Joan Marshall, executive director, College Savings Plans of Maryland
April 4, 2014
I’m excited about a new bill that was introduced last week in the House of Representatives (HR 4333) because it is designed to help those who are currently investing in 529 plans and encourage even more families to save for college with these great tax-advantaged, convenient and affordable plans. The main enhancements this bill would provide for college savers include:
- Making computers an eligible expense – Currently, families can only use funds from their 529 accounts for computers and related equipment (without taxes and the 10% federal penalty) if the college has a written policy requiring the purchase of a computer for the student’s attendance at that college. While a few colleges have this policy, most do not. However, we know that nearly every college student needs some sort of computer or laptop to successfully complete college level work.
- Allowing for investment changes up to four times a year – Currently, investors in certain 529 plans can move their funds from one investment option to another once per calendar year. This new provision would expand this to up to four times per year, which would allow quarterly re-balancing as well as the ability to respond to periods of unusual market volatility.
- Allowing the redeposit of funds in certain circumstances (e.g. a student gets sick at the beginning of the term) without negative tax implications – As a state 529 plan administrator, I personally know of families who have used funds from their plan to pay for college expenses, only to have a serious illness or other unusual event cause their student to have to leave college unexpectedly. With this provision, if the college provides the student with a full or partial refund, those funds can be re-deposited into the 529 account under certain circumstances so the account holder does not incur negative tax consequences and can hopefully re-use the funds in the future.
- Allowing funds from a 529 account to roll over to a Roth IRA under certain circumstances (e.g. a student receives a scholarship for their final year of school or graduates early) – In my opinion, this is one of the more creative solutions to some of the questions that many families ask before they are willing to commit to saving in a 529 plan: “What if my student does not go to college?” or “What if I save too much money and have funds left over?” With this provision, again within certain limits, families would have the ability to roll over unused funds (up to $25,000) to a Roth IRA for either the student or the account holder in the event that the funds cannot be used for higher education. Yes, taxes would be paid on any earnings at that point, but the federal penalty (10% of any earnings) would not apply.
This bill is the result of hard work by many in the 529 community, including states and their private sector partners. The entire 529 community owes a great deal of thanks to Representative Lynn Jenkins of Kansas and Representative Ron Kind of Wisconsin for being the lead sponsors of this bill, along with HR 529 that provides other enhancements to 529 college savings plans.
I hope that everyone who takes the time to read this message will contact their member of the House of Representatives and ask him/her to sign on as a co-sponsor of HR 4333. The more co-sponsors this bill has, the more likely it will be to become law. As long as you know your zip code, http://www.house.gov/representatives/find/ is an easy way to locate your representative.
About the Author:
Joan Marshall is the Executive Director of the College Savings Plans of Maryland, which offers both a 529 prepaid tuition program and a directly-sold 529 savings plan. Together, the plans have more than 215,000 beneficiaries with investments of more than $4 billion. Marshall is a past Chair of the College Savings Plans Network (CSPN) and is Co-Chair of the CSPN Federal Initiatives Committee.