Make the Most of 529 College-Savings Plans

If you have kids or grandkids, contributing to a 529 can help to stretch your college savings. The money grows tax-deferred and can be used tax-free for college expenses, including tuition, room and board, fees and books, and a computer for the college student. Students who attend college at least half-time and live off-campus can even use 529 money tax-free for rent, up to the room-and-board allowance that the college included in the cost of attendance for federal financial aid purposes (ask the financial aid office for the figure). About two-thirds of the states offer an income-tax deduction for contributions — you may need to contribute to your own state's account to qualify.

A 529 can also be a great way for grandparents to help grandkids with college costs. Most states let grandparents, and other friends and relatives, deduct their contributions, too. Some plans limit the deduction to the account owner, but grandparents can usually open a separate 529 and qualify for the break if offered in their state. There's no limit on the number of accounts that can be opened for a single beneficiary. See for each state's rules.

If the student earns a scholarship, you can withdraw up to the amount of the scholarship without penalty, but you will have to pay taxes on the portion of any withdrawal that represents earnings that aren't used for eligible education expenses. If the student doesn't attend college or doesn't need the money, you can switch the beneficiary to another eligible relative. (See the "Qualified Tuition Program" section of IRS Publication 970 at for a list of eligible relatives.) And the new tax law expanded the definition of "eligible expenses" starting in 2018. You can now use up to $10,000 per student each year to pay tuition for kindergarten through 12th grade tax-free, in addition to college costs. Ask your 529 plan representative about the procedure for making K-12 withdrawals — some states have to change their laws before these withdrawals escape state income taxes.


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