The abrupt end to the 2019-2020 school year in many parts of the U.S. left parents and students alike struggling to establish healthy routines. As many students prepare to head back to the classroom (or the remote classroom) this fall, what steps can parents take now to get their houses in order? Learn how dependent care accounts, 529 accounts, and other savings vehicles can help you financially prepare for your student’s future.
The SECURE Act significantly expanded the ways in which parents, grandparents, and others can take advantage of 529 educational savings plans.1 Before the SECURE Act, 529 contributions could be used only to pay room, board, tuition, and related educational expenses for the plan’s named beneficiary. Any non-educational withdrawals, including withdrawals made to repay student loans, could be subject to additional state income taxes and a penalty.
But now, parents and grandparents are permitted to withdraw up to $10,000 in 529 funds to repay student loans taken out on the student’s behalf. Another SECURE Act provision allows 529 distributions to be used to pay for textbooks, fees, and equipment for apprenticeship programs, not just traditional two- or four-year college degrees.
The American Opportunity Tax Credit, the Lifetime Learning Credit, the student loan interest deduction, the tuition and fees deduction, and the qualified education expenses deduction are just a few of the education-related tax breaks available under federal law.2 These benefits span a range of ages and education levels, with deductions available for everything from elementary school expenses and after-school care to college tuition and work-related education.
Many states offer their own education-related tax breaks, including credits or deductions for 529 contributions. Investigating each of your options can allow you to significantly defray the cost of schooling, including online education.
These accounts are a type of flexible spending account that allows parents to set aside up to $5,000 per year in pre-tax funds to be used to pay for eligible dependent care services. Eligible services include daycare and preschool for younger children, before- and after-school care for older children, and even adult daycare.
Like other flexible spending accounts, DCAs are generally “use it or lose it”—which means it’s preferable to err on the side of underestimating rather than overestimating your annual dependent care expenses. Though a change in circumstances (like a statewide stay-at-home order, a job loss, or a daycare facility’s closure) can allow you to reduce your dependent care contributions mid-year, in most cases, you’ll be bound to the amount you pledged to contribute during open enrollment.
Paying for school and childcare can be expensive, especially with the millions of job losses stemming from the COVID-19 pandemic. By exploring different ways to save, you could be better equipped tackle whatever changes may come your way.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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.
1 https://www.nytimes.com/2020/01/10/your-money/529-college-savings-accounts.html
Retirement Planning
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Education Planning