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Tax Issues & 529 College Savings Accounts

529 Plan

Do you have a 529 plan account? Then you will want to know about a pair of federal tax law changes which may benefit you and your student, one involving a February 16 deadline.

As 2015 ended, Congress passed the Protecting Americans from Tax Hikes Act (PATH). Deep in its fine print were two “sweeteners” – tax changes designed to help parents with 529 plans.

You can now pay for computer hardware & software with 529 plan dollars. Under the old rules, this was rarely permitted. In fact, federal tax law only allowed it if a university or college required students to have certain computer hardware, software, or computer-related technology as a condition of enrollment.

That restriction is gone now. Starting this year, you may buy computers, computer software, associated hardware, and related equipment with 529 plan funds. These technology expenses now fall under the category of Qualified Higher Education Expenses.

Refunded 529 plan money may now be reinvested in the plan. Here is where the February 15 deadline matters. If you have received a refund of money that was a 529 plan withdrawal from an Eligible Educational Institution, you can now put it back into the same 529 plan within 60 days. (For tax purposes, you will want a receipt showing when that 60-day period began.)

Why is February 16 important? Because that is 60 days from the day PATH was enacted, and if you received such a refund at any time during January 1-December 18, 2015, you have until Tuesday, February 16, 2016 to put that money back in the account. If you meet that deadline, the refunded money will not be categorized as a non-qualified 529 plan distribution that is fully taxable and also subject to a 10% penalty.

All 529 plan owners should be aware of these important changes for 2016 and years to follow.


About the Independent Financial Advisor

Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.

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