As kids head back to school, is saving for college on your mind?

Saving for college is a little different from saving for most other financial goals. The tricky part is that you don’t know the amount you need to save until the goal has almost arrived.

College costs can be anywhere from $0-$350,000 (give or take elaborate dorm décor). That is a huge range. Families approach college costs differently, but one topic comes up repeatedly: the 529 education savings plan.

What is a 529 Plan?

A 529 is a tax-advantaged account used to save for education.

·       You contribute after-tax dollars to the account and invest those dollars

·       The investments can grow tax-deferred, meaning you don’t pay taxes each year on the investment earnings.

·       When the money is withdrawn for qualified education expenses, the earnings can be withdrawn federal income TAX-FREE.

·       Anyone can contribute (calling all grandparents looking for gift ideas)

o   Contributions are subject to gift tax exclusion rules

Frequently asked questions:

Q: What counts as a qualified 529 distribution?

A: The answer is broader than many people realize.

For college and other eligible post-secondary education, qualified expenses can include:

·       Tuition and required fees

·       Books, supplies and required equipment

·       Computers, certain software and internet access used by the student

·       Room and board for students enrolled at least half-time, subject to certain limits

·       Expenses for certain special-needs services

A 529 is not limited to a four-year college. Funds can also be used at many community colleges, vocational schools and trade schools that meet federal eligibility requirements. 529 funds can also be used for registered apprenticeship programs, including fees, books, supplies and equipment.

Another newer use is for certain post-secondary credentialing expenses, which can help students pursue career or professional training instead of a traditional degree.

529 funds can even be used to repay up to $10,000 of qualified student loans for the beneficiary, with an additional lifetime limit available for each of the beneficiary's siblings.

Under current federal law, families can also use up to $20,000 per beneficiary per yearfor qualified K–12 expenses.

Q: What if my child doesn't need all the money in the 529?

A: This is often the biggest concern I hear from parents: What happens if I save too much?

Fortunately, there are several options:

·       Change the beneficiary. If one child does not need all the money, the account can generally be transferred to another qualifying family member without creating a taxable event. The beneficiary can also be changed to a future generation.

·       Unused 529 assets may be rolled into a Roth IRA for the beneficiary

o   Under current law, up to $35,000 over the beneficiary's lifetime may be transferred from a 529 into a Roth IRA in the beneficiary's name. Key rules apply: the 529 generally must be open at least 15 years, the rollover is subject to the annual Roth IRA contribution limit, and recent contributions plus related earnings are not eligible. This could give a significant kick start to a retirement savings plan.

·       You can take a non-qualified distribution. Your original contributions come back tax-free because you already paid tax on them. The earnings portion is generally subject to income tax and usually a 10% federal penalty.

Q: Who is taxed if we take unused 529 funds out for non-qualified expenses?

A: It depends on who receives the distribution.

When money is withdrawn from a 529 plan, a Form 1099-Q is issued to the recipient and reported under that person’s Social Security number. The recipient can be the custodian (typically a parent) or the beneficiary (the student). This matters because the account owner and beneficiary may be in different income-tax brackets.

Also remember: the entire withdrawal is not taxable. Your original after-tax contributions are not taxed again. Only the earnings portion of a non-qualified withdrawal is subject to ordinary income tax.

In addition, the taxable earnings are generally subject to a 10% federal penalty, although there are several exceptions to that penalty, including certain withdrawals associated with scholarships, disability or attendance at a U.S. military academy.

Q: Do I have to use the 529 plan in my state?

A: No, 529 plans can be used from any state.

Bottom line: a 529 is no longer just a college savings account. It can be a flexible planning tool worth discussing with your financial advisor.

***Talk to your tax advisor. This is not tax advice.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.