Tax savings on lifelong learning

Key Points

  • Professionals are returning to school for career growth or a salary boost
  • Culturally stimulating classes can help retirees stay healthy and engaged
  • Using a 529 plan to cover costs could provide tax and investing benefits

Does the end of summer bring back nostalgic feelings of returning to school? Perhaps you feel wistful or even envious as you see your kids or grandkids off to college. If so, you’re not alone. Today’s driven professionals and active retirees are hungry for knowledge, which may be good for their fiscal and physical health.

How so? For those who are still in the workforce, furthering their education can pave the way for a promotion or salary increase. Professionals with graduate degrees earn 30% more than than workers with a high school diploma.¹

Returning to school can also be a way to stay relevant in a dynamic field — especially when competing with today’s younger, tech-savvy workforce.

While many retirees are simply taking classes for fun or intellectual engagement, there may also be health benefits. Studies show that those who further their education — which could even mean learning a new language or musical instrument — tend to have lower rates of dementia.² And engaging in intellectually stimulating activity can reduce the risk of Alzheimer’s by up to 47%.³

We asked Chris Stack, Esq., Managing Consultant at Savingforcollege.com, how to pay for adult learning without dipping into your life savings.

What makes 529 savings plans popular?

Whether you’re tapping into funds earmarked for family education needs or opening a new account for yourself, a 529 account really stands out because most other tax-advantaged education vehicles have income and eligibility limits.It's the most flexible option for adult learners and offers tax-free growth. Withdrawals are tax free, federally, and tax free in most states when used for qualified education expenses.

 

In addition, 529 funds can be used to fund K-12 tuition expenses; withdrawals of up to $10,000 can be taken without federal tax. States vary in their treatment of taxes for K-12 tuition withdrawals.

Is there a limit to how a 529 plan can be used?

Most curriculum offered by higher education institutions is covered — whether you want to take cooking classes at a local community college or learn culinary skills through a study-abroad program in Northern Italy. In addition to U.S. colleges and universities, many colleges abroad are recognized as qualifying institutions for 529 funds. Many state universities offer a broad curriculum, which can include classes ranging from golf to the history of the Civil War.

Are the funds for tuition only?

As long as you’re a half-time student or more, you can spend 529 plan funds on housing as well — on- or off-campus. In fact, some colleges are forming retirement communities on or near campus for those interested in educational, cultural and sporting activities.

It’s also important to note that if you don’t end up going back to school, you can transfer the funds tax-free to children, grandchildren, stepchildren or other qualifying family members to fund qualified post-secondary education expenses and limited K-12 expenses.

Do all states offer 529 plans?

Currently, 48 states sponsor a 529 saving and investing plan — Wyoming and Washington do not — but the majority of states don’t require residency to invest in their plan. An advisor can help you compare plans and state tax benefits. An example of why it’s good to shop around: New York residents can deduct the first $5,000 of contributions each year from state taxes. But there’s no state tax benefit after that. You may want your advisor to help you compare investment options and fund performance trends among state plans.

How could a 529 align with my needs?

Many people think of a 529 plan as a savings account, but it’s really a tax-deferred investment vehicle, and each plan can have varied investment options with varied individual performance, risk tolerance and fees. If you want less risk, you could look at investments with more modest returns. On the other hand, if you want to retire and go back to school in five years, you may be willing to take more risk so your investments could potentially grow more. Your advisor can help you look for investments that are more tailored for growth potential, or if you’re investing for the short term, tax benefits and lower-risk features may be more important to you.

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