A 529 savings plan can do more than just help you pay for college — and those benefits could come in particularly handy during the coronavirus pandemic.
Today is 529 College Savings Plan Day, a day to focus on the advantages of these tax-favored plans. This year, it is being observed just a few months after the crisis upended the lives of many Americans. College students returned home to learn remotely, while the nation socially distanced to try to slow the spread of the virus. And, in the economic fallout of the crisis, many workers — parents and students alike — have lost jobs or had wages reduced, impacting their ability to save and pay for college.
Yet, less well-known uses of 529 plans can help "solve today's Covid-19-related issue of helping families to retool skills sets in mid-career training, career acceleration and time away from the job market," said Paul Curley, an industry expert on college savings plans.
The two main benefits of 529 plans are that they provide tax-free growth and tax-free withdrawals for qualified education expenses, such as tuition, room, board, fees and books.
However, you can also use the money to upgrade your technology, including computers, laptops, printers, internet service and certain software.
Those items have become essential, since many colleges and universities will continue to offer online class in the fall. Some, such as the California State University System, have already announced that all students will take fall classes online.
The pandemic also has many people rethinking their job prospects and looking to overhaul their skill sets. Students and their parents can use the 529 funds for graduate schools or apprenticeships. Eligible graduate schools must participate in the federal student aid programs, and apprenticeship programs must be registered and certified with U.S. Department of Labor.
Curley, who is director of savings research at ISS Market Intelligence, suggests thinking about a 529 plan as a "career emergency fund" that offers job protection or job acceleration, since higher levels of education is correlated with higher levels of income and lower levels of employment.
"If 529 plan is not used for your own career emergency fund, it can be used for your children or the next generation," he said. "It's becoming more of a family topic, not just parents, but grandparents, aunts and uncles, as well."
If you are struggling with debt, you can pay off up to $10,000 a year in qualified student loans with your 529 funds.
You can also use the money in your account to pay up to $10,000 a year for tuition for your child's private school.
However, while using your 529 to pay off student loans or for your child's K-12 education gives flexibility for non-traditional savers, you'll likely make more money if you stay invested longer, said Madeline Hume, a manager research analyst at Morningstar.
"From a tax perspective and investment perspective, staying the course, starting early and staying invested is the most optimized way to use 529 accounts," she said.
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"That's going to be the most profitable way for families to use these plans."
Hume, who recently authored a major study on the 529 landscape, also cautions against keeping 529 account money invested while you are in college and expecting the gains will be great enough to offset student loans. The Morningstar study found that is unlikely.
Using 529 plan money to pay for college, "preventing students from taking on more student debt, is better," she said.
Americans currently have $371.5 billion saved in 14.25 million 529 plans, according to the College Savings Plans Network.
However, the fallout from the coronavirus pandemic has some cutting back on saving.
Despite the benefits, Covid-19-related financial woes have caused 16% of parents saving for college to pause their contributions to a 529 plan, according to a survey by CollegeBacker, an online 529 plan platform. In addition, 13% said they reduced contributions and 17% planned to withdraw funds.
More than two-thirds of those withdrawing funds said they lost their jobs or had their wages reduced as a result of the coronavirus pandemic, the survey found.
If 529 funds aren't used towards qualified educational expenses, you'll have to pay income taxes and a 10% penalty on your gains. You may even have to pay back any state income-tax deductions that were previously claimed.
Also be aware of any tax consequences if you received a refund from your college or university for the spring 2020 semester expenses and used 529 plan money to cover the cost. Check with your specific plan to find out any ramifications and to see if you can redirect the funds back into the plan.
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