5 reasons to keep your 529 plan open during college

http://www.savingforcollege.com/articles/5-reasons-to-keep-your-529-plan-open-during-college

After you pay the first few tuition bills, you may be tempted to close out your child’s 529 college savings account. Perhaps you’ve only been able to save enough to cover the first couple semesters (which in itself can be a hefty sum!). Or maybe you’ve stopped making contributions so you figured you should just cash out. But even if there’s only a small balance left, it’s usually a smart idea to keep the plan up and running. Here’s why:

1. You can use the funds to pay for more than just tuition

So you’re done paying tuition for the year and your 529 balance has dwindled. Instead of closing out your account, think about what other expenses you might have coming up. To take advantage of federal (and possibly state) tax benefits, 529 funds can be used toward any qualified education expenses (QHEE), which include tuition, books, fees, supplies and equipment, some room and board costs and even computers when the school requires them.

2. Withdrawing too much money will cost you

As stated above, the coveted tax benefits offered by a 529 plan only apply to qualified purchases. If you use 529 funds to pay for non-qualified expenses you'll be subject to taxes and a 10% penalty on the earnings portion of the withdrawal.

What’s more, if you claimed the American Opportunity tax credit or Lifetime Learning credit, you also need to be careful to avoid “double-dipping”. Any amount of tuition expense used to generate the tax credit must be subtracted from the total QHEE to prevent a non-qualified distribution.

3. You can still get state tax benefits

According to a recent survey administered by Savingforcollege.com, 51.9 percent of those who chose to save with their own state’s 529 plan did so to take advantage of tax breaks offered to residents, such as state tax credits or deductions on contributions.

What you may not realize is that some states will give you a tax break no matter how long the money is kept in your 529 account. So even if your account balance is next to nothing but you still have upcoming tuition bills, you can continue collecting your state tax deduction by “funneling” your money through the 529 account. Simply make contributions to your 529 plan using the money you planned on paying tuition with, and withdraw when the bill is due.

4. You can get a head start saving for grad school

A CareerBuilder survey released last month revealed that 66 percent of recent college graduates are already pursuing an advanced degree or plan to in the next year. If you already have a 529 account set up this is a great way to get a head start. Annual tuition alone for a graduate degree program will run you $30,000 on average, but for many students it’s worth it – those who earn master’s degrees generally earn $400,000 more than those with only a bachelor’s degree.

If you’re the parent and you are only planning to help pay for an undergrad degree, this is your opportunity to turn the responsibility over to the student. Of course, college students aren’t exactly known for their disposable income, but another great feature of 529 plans is that many allow you to set up small automatic contributions. If your child is working a part-time job while in school, encourage them to budget $25 a month to set aside for graduate school.

5. You can use any leftover funds to pass down as a legacy

If your child graduates and there is still a balance in your account you have the option of changing the beneficiary to a grandchild or other relative. Contributions made to a 529 plan will also qualify for the annual gift tax exclusion, which in 2014 is $14,000 per individual.

Some grandparents use 529 plans as an estate-planning vehicle because even though the assets will remain in your name if you are the account owner, they will leave your estate. If you are trying to remove assets from your estate and want to make a larger gift, contributions between $14,000 and $70,000 can be treated as if they were made over a five-year period for gift tax purposes.