19 Feb Can a 529 plan pay for overseas college?

Q. My daughter moved to Australia six years ago. She just had a baby. The baby has both Australian and U.S. citizenship. I want to set up a 529 plan, but what are the implications if she goes to school in Australia instead of the U.S.?

— Grandparent

A. Congrats on your grandbaby, and she’s lucky to have such a generous grandparent.

529 plans are generally considered to be the best way to save for college because of the tax-free withdrawals for college costs.

A 529 plan used for school in another country would be eligible for tax-free distributions provided they have a federal school code that can be listed on the Free Application for Federal Student Aid form, also known as the FAFSA, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

You can search the school codes here.

He said there are more than 100 colleges that currently fall in this category, but most do not.

“If the college is in Australia and does not have this code, then the distributions would be subject to a 10 percent penalty on the gain, as well as ordinary income tax on the gain,” Lynch said.

Because it will be a long time before you know where your granddaughter will want to go to college, it’s hard to know if a 529 plan will be the right place to save.

“When in doubt, invest in an index fund which you can always gift to the child,” Lynch said. “You can control it, make changes and it is rather tax-efficient.”

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