Changes to 529 Plans Mean More Flexibility and Tech Improvements

Finance
Posted By Donna Fuscaldo on January 14, 2016 at 12:40 pm
Changes to 529 Plans Mean More Flexibility and Tech Improvements

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. But while 529 plans give savers a way to grow their money tax-free, it does have limitations. Recognizing that some of those limitations are almost relics in today’s technology-driven era, changes have been made to 529 college plans for 2016. That, in turn, may make it more attractive to savers, who aren’t utilizing 529 college savings plans in masse.

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.

Computer equipment counts as a qualified expense

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. “That’s a big change for a lot of families,” says Betty Lochner, chair of the College Savings Plans Network. “It can be a huge expense.” Instead of shelling out hundreds of dollars for an iPad, desktop or notebook computer, students can now use 529 savings to cover that expense.

Students won’t be penalized for leaving school

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 Lochner. “It’s like cashing out Microsoft stock. You have to start over and buy it again.” That all changes this year. Now, students who have to withdraw from college for whatever reason and get their tuition back can put reinvest it into the 529 account and avoid a tax bill.

Experts say that rule change is also a sign of the times. Rewind a couple of decades and students would go to college for four straight years, earn their degree and enter the workforce. Nowadays, students are juggling multiple responsibilities and can’t always complete their degree in four years.

Process improvements, lower fees down the road

The third change for 529 plans in 2016 may not be as huge as expensing computer equipment and not taking a tax hit for dropping out of school, but it does make it easier for families with multiple 529 accounts. According to Lochner, the government had accounting practices in place twenty years ago that are no long required because of advances in technology. By eliminating distribution aggregation requirements, it makes the process a lot less cumbersome for the plan administrator, which in turn can make it cheaper for them to operate. “Any process improvement savings could be passed on in lower fees,” says Lochner. “It’s important to have those kinds of updates.”

Employer match 529 plans next?

Looking out to beyond 2016, experts say more changes could be coming to 529 plans that will benefit savers even more. Lochner says the College Savings Plan Network is working on a tax savers credit in which 529 accounts would be treated like retirement accounts in which an employer can match contributions. In the case of 529, up to $600 would be matched and not taxed. While that didn’t make it into the recent legislation, Lochner says it was mostly a technical issue, not a cost one. “We’re working on improving the plan any way we can,” she says.

Donna Fuscaldo
Donna Fuscaldo is a freelance journalist hailing out of Long Island, New York. She has also written for Bankrate.com, Glassdoor.com, SigFig.com, FoxBusiness.com, Business Insider, Dow Jones Newswires and the Wall Street Journal.

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