5 Creative Uses for a 529 Plan


The cost of college tuition has risen at an average rate of roughly 8% per year over the last several decades. Case in point: The average cost of private undergraduate tuition at the University of Pennsylvania (an Ivy league institution), including room and board, fees, books, and other expenses was $2,770 in 1960. Adjusted for inflation, that's $22,219.24 in today's dollars. A mere half a century later it costs nearly three times that — $61,800.

Thankfully, 529 Plans, or Qualified Tuition Programs (QTPs), offer families a pathway to save for higher education expenses. In many ways they resemble retirement plans, offering significant tax benefits for savers. There are no federal taxes on your contributions' earnings and often no state taxes if you're a local resident and the plan's beneficiary attends college in-state.

But the benefits don't end there. Check out these creative uses for your 529 plan.

1. Pay for Your Own College Expenses

Did junior get a scholarship or decide not to attend college? Then consider using any 529 funds toward our own educational expenses. Most plans allow you to change beneficiaries once per year, enabling you to transfer the funds into your own name. If you'd waited to further your education until later in life, this can be a lower-cost way of paying for that long-awaited degree.

2. Think Outside the College Box

A traditional college is not the only place to get an education, and 529 plan assets can be used to pay for two-year associate degree programs, technical schools, trade schools, vocational schools, and for study abroad — as long as it's with an accredited institution.

3. Split Beneficiaries

Since you can change beneficiaries on a yearly basis, you could technically fund two (or more) beneficiaries' educations with a single plan. For example, if there's a gap in your children's ages and you prefer to only have one plan, you can do so — and still contribute to both their educations.

4. Fund Future Generations

The plan's beneficiary can be anyone you choose — including grandkids or great-grand children. It's a great way to ensure your legacy is put to good use — and by funding a 529 plan early, the monies can benefit from compounding over a longer period of time.

5. Pay for Non-Qualified Expenses With a Poorly Performing 529

While we usually don't recommend raiding tax-advantaged accounts early (you're usually stealing from your future and subjecting yourself to penalties), in cases of real financial need, withdrawals from a plan may become necessary. If your plan is in the red, you can withdraw from the plan without penalty in order to pay for non-educational expenses, if needed.

How Much to Save

How much you should save depends on whether or not your child intends to remain in-state or attend an out-of-state university. Will your child be attending a two or four year college?

Perhaps you want them to attend an in-state program and transfer into a more expensive out-of-state private school. Will he or she require room and board or participate in the school health plan? Will your student work to cover a portion of the costs?

These are all questions to ask yourself. But, also take into consideration college price inflation, which is outpacing regular inflation and at a much higher rate. Today's average cost of $45,000 per year to obtain a four year degree may cost as much as $209,743.07 in 20 years, unless something is done about the astronomical rate at which costs are rising.

At this rate you would need to save $3,000$4,000 a year assuming your earnings grow at 10%. The maximum annual contribution for 2014 and 2015 is $14,000. So, get saving!

Are you funding a 529 plan? How do you intend to use it?

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