Can I Start a 529 Plan for Myself?

The average cost of higher education has increased by 300 percent in 20 years and is averaged at about $35,720 per year per individual. In an attempt to make it less of a burden, investing in a 529 plan could be the way to make it manageable. Although most people contribute to a 529 plan for their children, it is possible to open and build a 529 plan for yourself.

What Is a 529 Plan?

A 529 plan is an investment tool and one of the options for college savings used to help alleviate the burden of the cost of school. It can be used to pay for any type of school including college, elementary or secondary tuition. The 529 plan has been around since 1996 and can be found in the IRS code 529. It is legally named the Qualified Tuition Program, or QTP for short.

Advantages of a 529 Plan

The best perk to opening a 529 plan is that they are exempt from federal taxation. Most of the time, they are also exempt from state taxes. As long as the funds are used for tuition or books, withdrawals will not be taxed.

Disadvantages of a 529 Plan

In some cases, a 529 plan is not the best course of action. If the designated individual chooses not to go to school, the money could potentially be lost. With recent revisions, there are ways to transfer the funds to siblings, but if the individual is an only child, that would not be beneficial.

IRS Guidelines for 529 Plans

In July 2018, the IRS created a refreshed guide for individuals to set up and contribute to a 529 plan. This was known as Notice 2018-58. In this update to the 529 plan regulations, the IRS reinforced the issues addressed in the 2015 Protecting Americans From Tax Hikes Act, along with two other changes from the 2017 Tax Cuts and Jobs Act.

According to these changes, ​$10,000​ per year per student can be appropriated toward schooling from kindergarten to college. In addition, $10,000 from a 529 plan is allowable to pay off the student loans of the named beneficiary. An ​additional $10,000​ can be pulled tax-free to pay back a sibling's student loans as well. This applies to multiple siblings.

One more provision of the changes is the ability to use the funds for apprenticeships with a registered federal labor department institution. This is an amazing option for individuals who choose not to go to college.

Restrictions for Contributions

Although there are no income eligibility thresholds that must be met, there are restrictions on contributions. Each state controls the limitations for 529 plans among citizens. These regulations are usually in reference to how much can be contributed to the plan. In some states, it is capped at ​$100,000​ and, in other states, it is more or less.

Tax-Free Withdrawals

As with any government-controlled savings plans, there are strict regulations on how and when you can use the money in the plan. The same applies to the 529 plan.

In order to withdraw the money without accruing heavy tax penalties, you must use it on specified school expenses. They include: tuition, school fees, books, technology needed for school and student loans.

If you do not associate the withdrawal with a qualified expense, you forfeit the benefits of the plan and will be charged with a hefty tax both on a federal level and potentially on a state level as well.