If you’re the parent of a future college student, you have to save now, but tucking money away in a savings account isn’t going to work. Many people turn to a 529 savings plan—a tax-advantaged plan that can help pay education expenses—to grow their money. Having a 529 plan strategy that maximizes your student aid options is ever more crucial. In the best possible scenario, you would combine 529 funds with help from the government to cover the complete cost of collꦓege for your child. But government help is often income-based—and that’s where handling those 529 funds strategically comes in.

When and How to Spend 529 Funds

Once a child reaches college, it might work to the family’s advantage to spend all of its 529 funds in the first two years to get 澳洲幸运5官方开奖结果体彩网:financial aid in the third and fourth years—if the parents expect a high-expense or low-income year. But thಌat may not work for everyone.

Depleting the 529 account first can make sense for some families, says , a certified financial planner and managing direc▨tor at Forvis Mazars.

“If you know yourꦜ education costs will exceed your 529 savings, I would recommend spending the 529 𒈔balance first before borrowing any money,” she says.

However, this isn't advisable if you t🌳hink you might have🔯 trouble getting a loan later. Running through 529 funds in the first two years can backfire, says of College Aid Partners.

“Families need to budget out the four years of college to determine the best course of action with spending savings and borrowing,” he says. “I have seen a number of families spend dow♓n their 529 accounts in the first couple of years but later run out of money and unable to borrow in the final years. These students are left without resources to finish college.”

What if you anticipate a falloff in family income?

“Low income is a relative term for people,” Orsolini says. “Dropping from $150,000 to $100,000 is a huge reduction, but in most cases, it will not result in addition꧋al financial aid. If your child is at an elite college that matches 100% of need, it might be worth relying on this strategy, but most colleges will not increase an aid package simply for🐲 spending down your 529 fund.”

The rules can be different for grandparents. “One important aspect to remember while considering when to spend the 529 money is who owns the plan,” says , a certif🌌ied financial planner and the founder and president of Arena Wealth Management.

“If a grandparent is the owner, for example, and they distribute funds from the 529 plan, the money will count as student income for next year’s 澳洲幸运5官方开奖结果体彩网:Free Applicati♊on for Federal Student Aid (FAFSA) and could negatively impact the student’s ability to qualify for financial aid,” he adds. “So when the g🅰randparent is the owner, often it’s best to leave the money in the 529 plan until the student has filed the final FAFSA (typically the j🌌unior year of college; deadlines vary by state and college)."

Factor in the Federal Tax Credit

The 澳ꦆ洲幸运5官方开奖结果体彩网:American Opportunity Tax Cr𒐪edit (AOTC) provides a tax credit of up to $2,500 when you spend $4,000 on tuition, fees, textbooks, and other course materials. However, it phases out at certain income levels ($90,000 for individuals or $180,000 for married couples filing jointly). Also, you can’t use the same expenses to justify a tax-free distribution from a 529 plan—there’s no double-dipping.

“The tax credit is worth more per dollar of 澳洲幸运5官方开奖结果体彩网:qualified expenses than the tax-free 529 plan distribution, even considering th𓂃e 10% tax penalty and ordinary income taxes on non-qualified distributions,” says , president of Cerebly Inc.

“Families should prioritize $4,000 in tuition and textbook expenses to b🗹e paid using cash or loans before relying on the 529 plan. Otherwise, [it’s preferable] to spend down the 529 plan balance as quickly 🐷as possible so that the assets do not persist year after year to reduce aid eligibility by 5.64% of the asset value.”

(The money in a 529 plan is considered a parental asset, and 5.64% is the percentage of parental assets that counts toward the 澳洲幸运5官方开奖结果体彩网:Student Aid Index each year on the FAFSA.)

New Rules for 529 Plans

Three tax reform laws—the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act (TCJA) of 2017, the Setting Every🎀 Community Up for Retirement Enhancement (SECURE)🦩 Act of 2019, and the 澳洲幸运5官方开奖结果体彩网:SECURE 2.0 Act of 2022—also made some relevant changes involving 529 plans.

For example, account holders can now use their 529 plans to pay the beneficiary’s K–12 education tuition at public, private, and religious schools. Those withdrawals will be tax-free on the federal level and in many states. So it’s now possible to spend down a 529 account before your child sets foot on a college campওus.

The SECURE Act, signed into law in December 2019, expanded 529 plan coverage to allow for some student loan repayment. Previously, 澳洲幸运5官方开奖结果体彩网:student debt wasn’t considered a qualified educational expense or eligible for tax-free withdrawals. Under the new rules, plan holders can withdraw a lifetime maximum of $10,000 from their 529, federally tax-free accounts to help pay off qualified education loans. That applies to the beneficiary; siblings can also draw $10,000 each.

The SECURE 2.0 Act, signed into law in 2022, further expanded the use of 529 funds. The law allows up to $35,000 of the total balance of a 529 to be transferred to a 澳洲幸运5官方开奖结果体彩网:Roth individual retire🌱ment account (IRA) in the beneficiary’s name. The 529 account must have been open for more than 15 years for this to apply, and transfers must still be made according to the annual Roth IRA limits, so it may take several years to meet the $35,000 maximum.

The Bottom Line

Like many financial questions, there are a lot of what-ifs here, but our experts generally recommend not spending all your 529 money now and betting on future financial aid. However, they note, the ꦺstrategy could represent a cost savings for certain people.