MONEY SENSE 28 JANUARY 2019 Good News • South Florida Edition Merrill Lynch Wealth Man- agement explains the uses of and limits to this popular education savings tool. Millions of Americans use 529 plans to sock away money for their kids’ and grandkids’ edu- cation. They are popular, in part, because of the tax benefits they can provide: withdrawals, includ- ing any earnings, are federal, and possibly state, income tax free when they are used for qualified education expenses. Previously only applicable to college-related expenses, effective January 1, 2018, 529 plan holders can also use up to $10,000 per calendar year per beneficiary to help pay for tuition at an elementary or secondary public, private or reli- gious school. Besides tuition and fees — the biggest educational bills you will probably face — other eligible expenses include such things as room, board, books, required sup- plies, the purchase of computer and peripheral equipment, com- puter software, or Internet access and related services, and certain expenses in the case of a special- needs beneficiary, as defined by the Internal Revenue Code. But there are limits to what sorts of expenses are allowed. “Using 529 funds to pay for a music degree at an accredited in- stitution for your daughter would be fine, but if you use them to pay for private piano lessons, you will be penalized,” says Richard J. Polimeni, director of the Educa- tion Savings Programs at Bank of America Merrill Lynch. “That penalty essentially means you have to pay income tax on the earnings portion of the money you withdrew, as well as a 10% additional federal tax.” However, you will never pay income tax or the additional federal tax on the principal portion of your with- drawal, regardless of what it is used for. The rules are fairly flexible when it comes to how many stu- dents can benefit from your 529 account. “Suppose you set aside $200,000 in an account for your daughter and you spend only half of the money,” Polimeni explains. “You could transfer the rest to an account for another family mem- ber of the beneficiary, for exam- ple, your son or even a niece or nephew.” If there is something left over, it can stay in the account in- definitely — and be ready, decades later, to help pay the cost of a grandchild’s education. Or it could even be used to fund your own or your spouse’s contin- uing education. If you want to set aside money for lessons or other edu- cational activities that a 529 ac- count does not cover, you could consider a trust or a custodial ac- count under the Uniform Gifts/Transfer to Minors Act (UGMA/UTMA). However, there are potential drawbacks to that strategy, Polimeni warns. “These gifts cannot be taken back and do not allow you to transfer assets between beneficiaries. And once the child you designate as bene- ficiary reaches age of majority — which varies by state—he or she will be free to spend the money for purposes other than educa- tion. “If that is a concern, you may decide you are better off using a typical savings or investment ac- count to earmark money for edu- cational goals that a 529 account does not cover,” Polimeni says. “Working together with your out- side tax and legal specialists, and your financial advisor can help you figure out what makes the most sense for your family.” [1]For distributions after De- cember 31, 2017, qualified higher education expenses include tu- ition in connection with enrollment or attendance at an elementary or secondary public, private, or reli- gious school. These distributions are limited to $10,000 per calen- dar year, across all 529 accounts for the same beneficiary. State tax treatment may vary. For more information, con- tact Merrill Lynch, Franz Koch in the Boca Raton office at 561-393- 4583 or
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