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How Do COVID-19 and Gap Years Affect 529 College Savings Plans? by Adam Slavin, CPA


Posted on September 12, 2020 by Adam Slavin

Millions of college-age students are taking a gap year or living at home during the Fall 2020 semester while many classes have moved online as a result of the COVID-19 pandemic. It is important for families to understand how these decisions may affect the funds they have saved in 529 plans.

A 529 college saving plan helps make a higher education affordable for more families by allowing contributions to grow tax-free when withdrawals are used to pay qualifying education expenses, including tuition and fees; room and board; computers, related equipment and internet access; and textbooks and other required undergrad and graduate school supplies. When plan withdrawals are used for non-qualified expenses, they are subject to ordinary income tax and a 10 percent penalty on the withdrawn amount. However, with the passage of the SECURE Act in 2019, families have more options for spending their 529 free of tax and penalties.

Effective for tax years beginning 2019, 529 education plan savings may be withdrawn by beneficiaries tax-free to cover expenses for an apprenticeship or job-training program, including required equipment and supplies. In addition, beneficiaries may use up $10,000 in 529 savings to repay their student loans or the loans of their siblings, or account owners may use up to $10,000 of per year to pay for a minor child’s K-12 tuition at a private school or religious school. Therefore, account owners may change the named beneficiary on a 529 college savings plan to another family member or even to themselves should they decide to go back to school to improve their professional skills or pursue another career field.

This additional flexibility to use 529 savings for other purposes is good news for families whose children may have changed their college plans for this year. Not only can beneficiaries use the funds from a 529 plan to purchase a much-needed new computer, but they may also use them to pay a portion of their off-campus room and board, including expenses for staying at their parents’ homes. Should students receive from their colleges a refund for any unused portion of a 529 plan distribution, they must either use those funds for qualifying education expenses or roll them back into their original plans to avoid taxes and penalties.

While the current health crisis may have put a dent in students’ immediate college plans, it should not derail strategies for helping students prepare for their adult lives. Now is a good time to meet with your CPA and advisors to ensure your education and career-savings plans continue to meet your specific needs and goals.

About the Author: Adam Slavin, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practices, where he provides tax planning and consulting services to high-net-worth individuals and closely held business.  He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.