Today, I decided to expand on the discussion about 529 college saving plans which was in an earlier blog post.  In my post called “My 529 College Savings Experience“, I covered that basics that the average person would need to know.  If the beneficiary decides not to use the money, and wants to cash out the plan instead, they will have to pay tax on the earnings and a 10% penalty

The list below are additional ways to get the money tax and penalty free.

• The potential student (beneficiary) dies, and the distribution goes to another beneficiary or the estate of the other beneficiary
• The designated beneficiary becomes disabled.
• If the beneficiary received any of the following:
  • a qualified scholarship excludable from gross income.
  • veterans’ educational assistance
  • employer-provided educational assistance
  • any other nontaxable payments (other than gifrs, bequests or inheritances) received for education expenses.

As you can see many of the ways to avoid the tax are pretty dark reasons, and depressing, so I didn’t include them in the initial post.

TheEliminateTheMuda blogger “Learn Life Coach” has a few kids with 529s.  But they are bright, and the Coach explained that he thinks they might get scholarships!  The good news is that you can get your money back without paying tax or the penalty, if they get a qualified scholarship!  So this is the one positive reason out of the bunch above where you can get your money back if you child/student gets a scholarship.

The Everyday Tips and Thoughts blogger “Kris“, also commented that you can transfer the 529 fund to another beneficiary if the original beneficiary decides not to go to school.

The less than obvious feature of a 529 plan is the level of control that the creator of the 529 has.  You control the plan, and have much control over it.  You can even take out your contributions tax and penalty free!  Of course that would undermind the entire idea of your 529 plan…  You can even change the beneficiary to yourself or anybody at any time.

My intent was just to introduce that it’s possible to avoid the taxes and penalty on the earning within the 529 plan by the above various means.

One of the biggest negatives, is that the amount of funds you have in the plan could effect the amount of financial aid available to the beneficiary student, when the apply.  But if the parent of the beneficiary owns it, the financial aid office will only take into consideration 5.46% of the value (not too shabby!!!)

What vehicle are you thinking about using for college cost?  If you current are the beneficiary of a 529 and using it, please tell your experiences with it!

-MR