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Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Considerations for a 529 Plan Account in a Bear Market

The "bear market" we are currently experiencing is without question causing hardships for many, and no doubt requiring tough decisions to be made, especially by those who were relying on current investments to fund an imminent expenditure. 

With the commencement of fall classes at colleges and universities across the land, such is the case for those who have saved to pay for higher education by contributing to and making investments through section 529 education savings plan accounts (referred to simply as 529 accounts here on out).

As a refresher, section 529 accounts are a vehicle for saving and investing for qualified education expenses incurred from kindergarten through college. Earnings on investments in such accounts are tax-deferred, and become tax-free if the funds are spent on qualified education expenses.

No investor wants to be in the position to be forced to "sell low". But with major market indexes across the board down in 2022 by double digit percentages from all-time highs that occurred literally within that last twelve months, and school tuition and other costs being incurred now, many who were counting on a 529 account to help fund those bills are potentially facing a "sell low" situation. 

For instance, the Dow Jones Industrial Average as of this writing is down 15.18% year-to-date, with some other indexes experiencing even steeper declines. Many 529 accounts have been decimated by this market, suffering major loss of value, right at a time when the plan may have been to sell some of the 529 investments to pay for education costs. 

So, what to do? While we can't control the trajectory of the market, history shows that in the long-term, the market has always grown in value. The timing, of course, of when this will occur is the subject of much speculation, but eventually, experts uniformly agree it will recover and then continue on up. The idea, then, is to give yourself as much time as possible to make the sell decision, thus increasing the flexibility you have, and hopefully time for your investments to recover. 

One way to do this is to be sure you are taking full advantage of all the other education tax breaks you may have at your disposal before tapping into 529 funds. For example, are you eligible and have you taken advantage of the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC)?

With the AOTC, 100% of the first $2,000 and 25% of the next $2000 can be taken as a tax credit per each student, for a potential $2,500 that wouldn't have to be drawn from your 529 plan. The AOTC is only available for the first four years of a student's higher education. 

The LLC, on the other hand, can be used for undergraduate, graduate or even professional degrees for an unlimited amount of time, however, is not quite as generous. The LLC is 20% of your qualified costs, up to a maximum of a $2,000 total credit per year per student. 

The eligibility for both credits is subject to income limitations, which are different for each one. There is also Tuition and Fees tax deduction that is available to some taxpayers who may not be eligible for either of the above credits for some reason. For more information, check out this IRS page,

Whether or not the above tax benefits are available to you, there may still be merit to using other monies, if any, you may have available for paying current education costs. Again, the idea is to delay as long as possible the use of 529 accounts funds to give you maximum flexibility as to when to liquidate investments and to give recovery some time.

For example, you don't have to make a 529 account withdrawal at the time the expenses are paid. You have until December 31, 2022 to make a qualifying withdrawal from the 529 plan account for any college costs incurred during the entire year of 2022. A lot can happen in the market in three months' time, as we know. 

This same strategy can be used for costs to be incurred for the Spring 2023 semester. Many times, those bills go out before year-end, but don't have to be paid until next year. Deferring payment until 2023 and using other available funds will give you until December 31, 2023 for the 529 account to recover and take a reimbursement for 2023 costs.

Another thought, if you have other kids or family members coming along later, and can afford to do so, your 529 account can be saved for their use at a more opportune time, as you can easily transfer beneficiaries between family members. 

While none of the above is a total solution to the current market downturn dilemma, incorporating these tips into your planning may help you stretch your education dollars a bit further, and help get you through this trying time.

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