ANSWERS TO YOUR 529 PLAN QUESTIONS

Thanks to recent policy changes, families have more options for what to do with money sitting in these tax-advantaged accounts.

- MALLIKA MITRA

WHEN a child is born, parents tend to adjust their budgets to account for diapers, baby food and child care— not necessarily for the cost of the child’s college education years down the road. But as the cost of higher education continues to rise, it’s more important than ever to start saving early and often.

Enter 529 college-savings plans, which since their creation in 1996 have helped families stash away money for higher education by offering tax-free withdrawals on qualified expenses, including tuition, housing, books and meal plans. Despite the benefits that come with 529 plans, some parents hesitate to save in them: Just 30% of families use a college-savings fund such as a 529 plan, according to the Education Data Initiative.

“A lot of people don’t save in 529s because they’re concerned about what happens if their kid doesn’t go to school,” says Michael Hunsberger, a certified financial planner and owner of Next Mission Financial Planning. “But there are options.”

Many of those options come in the form of new rules around how unused 529 funds can be put to work. If you have money in a 529 but your child no longer needs it for education, you may have questions about how to use the funds as well as about the recent rule changes. Here’s what you need to know.

My child graduated from college, but we still have unused funds in her 529 plan. Can we just withdraw that money?

When you withdraw money from a 529 for a qualified educational expense, that distribution isn’t subject to taxes or penalties. But if you withdraw the money for a nonqualified expense, you face both federal income taxes and a 10% penalty on the earnings portion of the distribution. You may pay state income tax, too, depending on where you live.