April 20, 2017
Readers continue to write to us with questions about financing college, including how best to use “529” plans, the tax-advantaged higher-education accounts that invest in mutual funds. We asked experts to help answer this month’s questions. An excerpt from Treasurer Boozer’s interview is below…
I would like to reward employees by starting 529 accounts for their children that will vest after 10 years of the parents’ employment at our company. Is this possible?
Yes. Because a 529 is funded with after-tax money, the main advantage of a workplace payroll-deduction 529 account is convenience for the employee.
In terms of vesting, you are allowed to set any restrictions you wish on a workplace plan as long as you follow the IRS rules regarding 529 accounts, says Alabama State Treasurer Young Boozer III, who chairs the College Savings Plans Network.
“Employers may contribute a match or add additional funds, but the employee will be taxed on these amounts, which are considered income to the employee, unless the employer makes arrangements to pick up the IRS tab,” Adam says. Some states, including Nevada, give tax credits to employers who offer 529 plans and match employee contributions, she says.
Before launching your program, call the 529 plan administered by the state where your company is based to see if there are any other state incentives that could benefit your employees, Boozer says.
When paying my child’s tuition, I first paid the college myself and had our 529 plan reimburse me. Then I read that I should instead have the check sent in my child’s name, so when I made a withdrawal from another one of our 529 plans, I did that. Will this affect our taxes?
You are allowed to have the check made out in either name, so you have done nothing wrong. “Essentially, the tax consequences, if any, are applicable to the payee of the check, as they received the 1099,” Boozer says. If you used the withdrawal for qualified educational expenses—tuition, books, mandatory fees, room and board, computers and related costs—you won’t have to pay any taxes. If the money went toward something else, you’ll have to pay taxes on any gains, plus a 10% penalty (you won’t owe anything on the portion of your withdrawal that represents your contributions to the account).
“One caveat: If at any point you do end up with a taxable 529 distribution, either because you withdrew too much, or withdrew the wrong year, or withdrew funds to cover nonqualified expenses, it is usually beneficial tax-wise to have that withdrawal reported to the student, who’s probably in a lower tax bracket, rather than to the parent,” Adam says.
As I understand it, computers are only allowed as a 529 expense if the computer is listed as a requirement by the college. Is that correct?
No. As of Jan. 1, 2015, you can use 529 money to buy computers and related equipment even if the school doesn’t require it. What’s now covered: the purchase of any computer technology such as laptops, desktops and even iPads, related peripheral equipment such as printers, computer software used primarily for educational purposes, and related services such as internet access if used by the beneficiary of the 529 plan during any of the years the beneficiary is enrolled at an eligible educational institution, Adam says. Adam recommends keeping your receipts in case the IRS asks about them, and matching your 529 withdrawals to the same year you bought the computer equipment.
Huge thank you and congratulations to our ABLE Committee Chairs @MOTreasurer @Eric_Schmitt and @ILTreasurer Mike Frerichs for their great job..