Section 529 Plans | Parents Saving College Money Tax-Free


Tennessee Permanent Parenting Plans can include agreements for parents to set up and fund Section 529 savings plans

Tennessee Permanent Parenting Plans can include agreements for parents to set up and fund Section 529 savings plans.

Tennessee Permanent Parenting Plans can include agreements for parents to set up and fund Section 529 savings plans to fund children’s college tuition, room and board, fees, and expenses. Parents’ monthly contributions over time build up tax free and ensure college monies will be there when needed.

Section 529 Plans for Tennessee Parents | Saving College Money Tax-Free

A Qualified Tuition Plan (“QTP”) is commonly called a “529 Plan” since it is governed by Section 529 of the Internal Revenue Code.  A 529 Plan allows a parent to save for college or prepay tuition.  The main advantage of a 529 Plan is that it allows money to grow tax-free, and as long as the money is used for educational expenses, the money is not taxable when withdrawn.

529 Plans also keep the money under a parent’s control until it is used for college expenses.  When a 529 Plan is set up, the parent names the beneficiary, and this is generally the person who will benefit.  However, that person has no ownership in the money, and the original donor “calls the shots” as to how the money is spent.  The original donor has the option to transfer the account to another relative, or even withdraw the money himself or herself (although there would probably be taxes due in that case).

Money invested in a 529 Plan is not tax-deductible on the parent’s federal tax return in the year in which it is invested.  However, some states allow the parent to deduct contributions to state-run plans from state income taxes in the year in which the contribution is made.  (Contributions are not tax-deductible in Tennessee.)

529 Plans are managed either by a state or by an eligible educational institution.  The state-run program in Tennessee is TNStars, which is offered by the Tennessee Treasury Department.

There are two types of 529 Plan.  The first is a prepaid tuition plan.  Under a prepaid plan, a student’s family pays tuition (normally pegged at the tuition rate of the state university) at today’s tuition rates.  When the student attends college, the tuition will already have been paid.  Since tuition rates have been increasing faster than inflation, this can result in a large saving.  Even though the amount of tuition is usually pegged to the rate of the state university in that particular state, the money can usually be used at other institutions.  Currently, only a few states offer prepaid tuition plans.  Tennessee’s prepaid tuition plan was called the Baccalaureate Education System Trust (BEST).However, this prepaid plan was closed to investment in 2010. Some public universities, however, still offer prepaid tuition plans. The Private College 529 Plan is a prepaid tuition plan offered by a group of 270 private colleges and universities.  Under this plan, the participant pays for one semester of tuition at today’s rates.  If the beneficiary attends one of the participating schools, the tuition has already been paid.  If the beneficiary does not attend one of the participating schools, then the money can be rolled over into a state-operated plan.

The other type of 529 Plan is the savings type plan.  The current Tennessee 529 Plan, TNStars, is a savings plan.  A savings plan is not pegged specifically to tuition prices.  Instead, the growth of the investment is based upon market performance of the plan assets.

The main tax advantage of either type of 529 Plan is that when money is paid out in a qualified distribution for higher education expenses, then the distribution is exempt from federal income tax.  In many states, these distributions are also exempt from state income tax.  In some states, this is limited to the state’s own plan, even though most states allow residents of other states to participate in 529 plans.  However, in most cases, the distribution would be subject to state income tax if the 529 plan was in a different state.

Tennessee does not offer a tax deduction or credit for distributions from a 529 Plan.  Therefore, the distributions would be subject to Tennessee income tax.  This means that in Tennessee, the tax consequences of the distribution would be the same for TNStars as they would be for a plan offered by another state.  Most state plans are available to nonresidents.  Therefore, in a state such as Tennessee without a state tax deduction or credit, a parent considering a 529 Plan should shop around and consider plans offered by other states.

The money from a 529 Plan can be used for educational expenses such as tuition and fees, books, and required supplies and equipment.  This money can be used at any accredited college, university, or vocational school in the U.S., and at some foreign universities.  The money can be used for room and board, as long as the student is at least a half-time student.  If the money is not used for educational expenses, then it is generally subject to income tax, and may also be subject to a 10% early-distribution penalty.

Since most 529 Plans are now savings type plans, there is always the possibility that the investment will lose value.  One advantage of the 529 Plan is that losses may still be deductible.  After all of the money has been distributed, a parent is entitled to a deduction if the total distributions were less than the total amount of contributions.  (This deduction is limited to 2% of the parent’s adjusted gross income.)  In this way, a 529 Plan can be used to “hedge your bets.”  As long as the money is used for educational expenses, then the distributions are not taxable.  However, if there were losses, then the losses are deductible.

A 529 Plan is set up for a particular beneficiary.  Normally, if there are more than one child who is expected to attend college, a parent can set up one plan for each child.  If that child does not attend college, it is possible to transfer the money to a 529 Plan set up for another person, as long as that person is a family member of the original beneficiary.  For example, if a parent sets up a 529 Plan for one child, and that child does not attend college, it would be possible to transfer the money to the education expenses of another child, the child’s spouse, their parent or step-parent, or even a first cousin.

For more information, see College Tuition & Costs in Tennessee Child Support Laws.

References, Resources and More:

About 

Memphis divorce attorney and family lawyer, Miles Mason, Sr. JD, CPA founded the Miles Mason Family Law Group, PLC. The firm practices divorce and family law only representing clients living in Memphis, Germantown, Collierville, Bartlett, Eads, Shelby Co., Fayette Co. Tipton Co., and the surrounding west Tennessee area. For more information, see our Meet the Team page.

Copyright © 2017 Miles Mason Family Law Group, PLC   - Disclaimer