By Hon. Michael L. Fitzgerald, State Treasurer, State of Iowa
October 17, 2016
For many people, October and Halloween mean tricks and treats and anything scary, with frightening movies playing on almost every channel, and scary stories being told at slumber parties. One scary story relating to saving for college making the news for a few months is of parents raiding their kids’ 529 accounts.
An article written by Kelli B. Grant at CNBC in August, titled “Raiding your kids’ 529 college plan is mean and dumb,” references a T. Rowe Price survey of parents with college savings plans for children between the ages of eight to 14. According to this survey, 18 percent of parents who had taken money from their child’s college savings accounts used some of the funds for education, and only 3 percent used all of the withdrawn funds solely for education.
Instead of using the funds for higher education, some parents withdrew money from a 529 to pay for monthly bills, vacations, weddings and more! The numbers provided by the T. Rowe Price survey point to the idea that many participants with 529 accounts believe they’ll lose any money they don’t use for higher education. Others believe they can withdraw these funds and use them for non-educational purposes without penalty.
The truth behind these scary myths is that using 529 funds for non-educational purposes will draw earnings penalties, federal taxes, and possibly even state taxes. Plus, 529 funds left in accounts will never go away, can be used for further schooling and can be transferred to another member of the beneficiary’s family, including siblings, first cousins and even parents.
One of the biggest things to remember about 529 college savings accounts is that time is an asset. The longer the funds stay in their 529 accounts, the more likely they are to grow and compound. Instead of taking money out and then putting more back in, participants should allow their funds the time to grow without interruption.
All the money that grows within these 529 accounts are tax free from both federal and income taxes and in some states state income taxes as well. Withdrawals are also exempt from federal income taxes (and state taxes as well in some states) when used for qualified higher education expenses.
These funds don’t just have to be used at colleges and universities or for just tuition and fees, either. 529 funds can be used at trade schools, vocational schools, grad schools, and for room and board, books and supplies, and many other required expenses.
It might be a frightening to think you could lose any earnings in your child’s 529 plan if they don’t use it all, but have no fear, because that simply isn’t true. Give your children the gift of education this Halloween, and maybe a little bit of candy, and keep their 529 funds intact until it’s time to send them off on their higher education adventure.
About the Author: Iowa State Treasurer Michael L. Fitzgerald is the Past Chair of the College Savings Plans Network and the administrator of Iowa’s 529 College Savings Programs including College Savings Iowa, with more than $4.2 billion invested.