I’ve previously covered 529 plans at length, but given the outrageous costs of post-secondary education these days (and the $1.7 trillion+ in student debt created by those costs), I thought it would be worth exploring the possibilities of using a 529 plan for your own educational expenses, for those readers who are thinking about furthering their education.
What is a 529 Plan?
To recap, a 529 plan is a tax-advantaged savings plan designed to encourage saving and investment for future education costs for a designated beneficiary. They are also referred to as “Qualified Tuition Programs” (QTP’s), and the “529” moniker comes from the section (529) of the IRS tax code that they reside in.
There are two types of 529 plans – prepaid tuition and tax-advantaged savings plans. Very few states still have prepaid tuition plans, so I won’t spend time on them here. All 50 states, on the other hand, administer their own 529 savings plans. You are free to choose a 529 from any state, however, there may be advantages to choosing the one offered by your state of residence.
There are a few key benefits to 529 savings plans. First, some states allow tax deductions on part or all of contributions. Next, while contributions are not federal income tax deductible, 529 plan earnings on qualified withdrawals are federal income tax-free (given that they meet IRS criteria). In this regard, 529 savings plans are like Roth IRA’s, with the additional possible benefit of a state income tax deduction.
There are also some downsides and risks with 529 plans. More on those later.
Can I Use a 529 Plan for Myself?
529 plans are typically thought of as a type of savings plan that parents establish for their children (or grandparents for grandchildren) to help build up savings for the future cost of education. While that is true (and most 529 plans are used to build education savings for a child beneficiary), 529 plans can also be used for your own educational expenses. And you can be any age when using one.
When you set up a 529 plan, you name one beneficiary. That beneficiary could be a child, another relative, a friend, or even yourself. There are no income restrictions on either you, as the contributor, or the beneficiary. There are no limits to the number of plans that you can set up. And there are also no tax consequences if you change the designated beneficiary to another member of the family (including yourself).
What Can 529 Plans be Used for?
529 plans can be used to pay for all qualified education expenses, including tuition, room & board, mandatory fees, books, & computers at eligible post-secondary schools.
An eligible post-secondary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other post-secondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited post-secondary institutions meet this definition.
Should you Use a 529 Plan for Yourself?
There are some risks to using a 529 plan for yourself.
First, 529 plans are a type of investment account. And funds invested in non-cash options are subject to market losses. If you are contributing and investing for the short-term, your money-saving efforts could actually result in a loss.
Next, unlike with HSA’s, if you are the beneficiary of a 529 plan, unused funds cannot be used for whatever you desire when you turn 65 (similar to an IRA), without penalty. In fact, with few exceptions, any unqualified distributions are subject to income tax on earnings plus an additional 10% penalty on those earnings.
Before making 529 plan contributions for your own education expenses, it will likely be more beneficial for you to make sure that you and your spouse are first getting your maximum 401K matching funds from your employer. Even then, you’ll want to make sure that the funds are used for qualified education expenses for yourself (or to another designated beneficiary). If the funds are not used for educational expenses, you could be left with a hefty tax bill on withdrawals.
But, if 529 all funds are used for educational expenses, as planned for, then a 529 plan can be a solid tool in the toolbox to help address the high costs of furthering your education.
For additional information on 529 plans, refer to my prior article on them and to Chapter 8 of IRS Publication 970, Tax Benefits for Education.
I think it’s too risky. As you wrote, “First, 529 plans are a type of investment account. And funds invested in non-cash options are subject to market losses. If you are contributing and investing for the short-term, your money-saving efforts could actually result in a loss.”
If parents start a 529 plan for a kid, their kid is normally extremely young, e.g. won’t be in college for 18 years or so. And over such a long period of time, the market almost always goes up. Whereas if you’re looking to self-fund your own education, you probably have a much shorter window, maybe a few years before you start registering for classes. Too high of odds that you’ll lose money for this to be a meaningful idea, IMO.
Yes – I think it depends on what the investment options are. If you can park short-term funds in to a money market fund or CD’s, that would mitigate the risk.
Great article! I’m 29, working full-time, and currently using my NY 529 plan to pay for my part-time grad school. I’ve been saving $5K into the 529 plan since I was 22. I wanted to get the max NYS income tax deduction and I knew I’d go to grad school eventually and could use the money on myself. Ultimately, I believe the tax deductions and the portfolio return has made it worth doing. Maxed my Roth IRA, and my company 401k matches as well. Of course, my 529 plan is nowhere near covering my grad school costs and the portfolio is making its first negative return this year. I’m not withdrawing anymore from the 529 until it goes back into the black. Even with the market down, it’s worth depositing into the 529 if other tax advantaged accounts have been maxed! I write a money blog and go into detail on how I’m paying for grad school at moneymicdrop.com.