A 529 plan can be a powerful tool to help you pay for expenses related to attending a four-year college. But it also can help soften the financial blow from a variety of educational institutions and is worth a look for anyone interested in leveling up their skills or knowledge.
These tax-advantaged savings plans, sponsored by states or institutions, are designed to pay for future education costs. But what counts as a qualified expense isn't just tuition, books and room and board anymore. Recent changes to the laws governing these plans have expanded what's considered a qualifying expense that allows you to make tax-free withdrawals from the account.
If you're considering opening a 529 plan, it's worth noting that you're not locked into the plan of the state where you reside, and can open one that's sponsored anywhere in the country. Several of CNBC Select's top picks include Utah's my529 plan, Ohio's CollegeAdvantage plan, and Illinois' Bright Start College Savings Program.
my529 (Utah)
Minimum opening balance
None
Maximum overall contribution
$540,000
Portfolio options
4 age-based options which automatically rebalances each year; 10 static options based on risk tolerance and U.S. stocks and bonds (investors control allocations); 2 customizable options (age- or static-based)
Underlying funds
Dimensional Fund Advisors mutual funds, PIMCO Interest Income Fund, Vanguard Group funds and FDIC-insured accounts from Sallie Mae Bank and U.S. Bank
Fees and expenses
Total asset-based expense ratio: 0.131% to 0.136% for my529 target-date options; 0.130% to 0.455% for customized static and age-based options, depending on investment mix; 0.211% for stable value option
Terms apply.
CollegeAdvantage (Ohio)
Minimum opening balance
$25
Maximum overall contribution
$523,000
Portfolio options
Choose from age-based, risk-based, DIY options and FDIC-insured accounts
Underlying funds
Age- and risk-based portfolios from Vanguard; individual options includes ones from Dimensional Fund Advisors and Vanguard
Fees and expenses
Total asset-based expense ratio: 0.145% to 0.435%
Terms apply.
Bright Start College Savings (Illinois)
Minimum opening balance
None
Maximum overall contribution
$500,000
Portfolio options
Choose from age-based, target (based on risk tolerance and/or fixed-asset allocation) and individual fund portfolios
Underlying funds
Investors can choose from 11 funds including ones through DFA, Dodge & Cox, T. Rowe Price and Vanguard
Fees and expenses
Total asset-based expense ratio: 0.07% to 0.79%
Terms apply.
Here are five costs that aren't the traditional college experience and could count as qualified expenses for 529 plans.
1. Apprenticeships and technical school
Once you get a high-school degree, there are plenty of choices for furthering your education that don't involve a four-year college. From community colleges to culinary schools to technical training programs, these post-secondary options could all have qualifying expenses covered by a 529 plan, according to Paul Curley, a chartered financial analyst and director of 529 and ABLE research at ISS Market Intelligence.
This also includes apprenticeship programs, where you receive on-the-job training in a profession of your choice. According to the IRS, 529 funds can also help with supplies and equipment required for certain apprenticeship programs.
2. Mid-career changes
Whether you want to pursue a dream job or you simply spot an opportunity outside your current field, funds in a 529 account could be a tax-advantaged way to get on the path to your new dream career.
While that could mean going back to a traditional college for another undergraduate degree, it could also require a technical degree, an apprenticeship, or even a post-graduate education. A 529 plan could help pay for the expenses associated with all of these ways of gaining the credentials you need to switch up your career.
3. Funding K-12 education
You don't have to wait until after high school graduation to tap those 529 funds. The IRS states that because of the Tax Cuts and Jobs Acts, 529 plans can now be used to pay up to a total of $10,000 of tuition per beneficiary each year at a K-12 public, private or religious school.
Curley used money from his 529 plan to help pay for his 2 children to attend public school in the summer, which he felt was necessary after disruptions from Covid. "These public schools for the summertime are not necessarily free," he said.
4. Student loan repayment
Student loans are a big roadblock for many people after graduating college. Though it's less common, you can repay student loans with funds from 529 accounts.
The IRS states that student loans are an eligible expense for 529 plans, though in limited amounts. You'll only be able to pay off $10,000 of the account beneficiary's student loans. With the average student loan debt for people aged 25 to 34 at over $33,000, this amount won't completely cover the typical American student's loan balance. Still, it can make up to a $10,000 dent in your student loan debt, which is nothing to scoff at.
5. Internet and other education-related expenses
School supplies mean more than textbooks, and much of the tech necessary to complete a post-secondary education program can qualify as an expense for a 529 account. "Think about computer software, internet access, and all the different peripherals that are related to that computer or laptop and going to school," says Curley.
Just make sure this equipment is listed with the program as a requirement for the student's attendance to qualify, however. Otherwise, it's unlikely to count as a qualified expense.
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Bottom line
Whatever career a student decides to pursue, a 529 plan can cover a number of the education expenses related to their development. Even if their career path doesn't include four years in college, things like apprenticeship tools, K-12 tuition and even internet and computer expenses could be qualified for tax-free distributions.
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