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INDIVIDUAL RETIREMENT ACCOUNT: The name says it all
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529 Plan Dos and Don'ts

As arguably the most popular college savings vehicle, it is especially important to detail the specifics of these plans so that you understand how to utilize them correctly and effectively. We will start by discussing what you should do when using a 529 plan:

  • Contribute – Investments grow tax-deferred and distributions are not taxable if used for qualified higher education expenses.
  • Review investment allocation – Account allocation should shift to more conservative investments as the beneficiarys college start date gets closer.
  • Be mindful of state tax benefits – Your contributions may be state tax deductible depending on where you live; for many states, you only receive the deduction if you invest in your states particular 529 plan, but for five states (PA, AZ, MN, KS, MS) you will receive a deduction regardless of which state’s plan you invest in. However, some of these states offer other minor tax benefits for their own plans which may be worth reviewing.
  • Explore other states’ plans – If you live in one of the states that either do not offer any tax benefits, or one of the five that does not limit plan choice, it would be wise to compare investment options and fees, since tax benefits may not be a point of differentiation. This can be important depending on your residence, as some states plans can be better than others.
  • Coordinate with other benefactors – If multiple people have 529 plans for a particular individual, it is important to ensure that everyone is on the same page so that more than one person is not taking distributions for the same expenses.
  • Take funds from high gain plans first – Since earnings on qualified withdrawals are tax-free, it is more tax-efficient to utilize the account with the most earnings for the qualified distributions and leave the account with less earnings for the non-qualified distributions since the earnings on distributions from the latter will be taxable and penalized.

Now, we will outline what you should not do, for the risk of being taxed and penalized:

  • Fail to match up distributions and expenses – One of the most important aspects of managing a 529 plan is making sure that withdrawals do not exceed expenses. This is why it is imperative that you match distributions and payments in the same year. Consider waiting until the end of the year to take distributions; at that point, you should have a better idea of what the net eligible expenses were for reimbursement.
  • Fail to consider financial aid and scholarships – Student loan payments are not considered qualified higher education expenses, so distributions to cover these payments will be considered non-qualified. Additionally, it is important to note that should the beneficiary receive a scholarship, you are able to withdraw that same amount from the plan without paying the penalty (you will still have to pay taxes on the earnings, though).
  • Take distributions for non-qualified expenses – Before taking a distribution, ensure that the amount you are asking to be reimbursed for is classified as a qualified higher education expense. For example, off-campus housing costs above the university-mandated allowance, travel, room furnishings, etc. do not count as qualified expenses.
  • Double dip – If you are planning on claiming the American Opportunity Tax Credit or Lifetime Learning Credit, make sure that you are reducing your plan distributions in-kind.
  • Forget that you can change the beneficiary – If a 529 plan is overfunded for whatever reason, you can always change the beneficiary to another family member, including yourself, if it makes sense.

If you intend to help someone save for college, you may wish to consider having a MASTERPLAN done first as the above list is not comprehensive. This financial plan will take a comprehensive look at your financial situation and help determine a plan for funding these education expenses, as well as recommend the appropriate investments. Please contact Hefren-Tillotson for further details.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Investment Advisory Team
Hefren-Tillotson

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Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills.