02 Dec Will this 529 plan money lose tax-free status?

Q. Is there any restriction on the use of 529 plans in New Jersey? I’ve heard if the funds aren’t used for a school in the Tri-State area, you lose the tax-free growth and you would be responsible for the capital gains taxes in the account.
— Unsure

A. What you heard is wrong.

Here’s how the 529 plans work.

Some state 529 plans allow contributions to the plan to be deductible for in-state residents. New Jersey’s plans do not give that advantage.

New Jersey offers two 529 college savings plans, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

“The first is the direct-sold NJBEST 529 plan which has very low fees, but fewer investment options,” she said. “The second one is offered through Franklin Templeton, which is sold through financial professionals but offers more robust investment options.”

Unfortunately, she said, neither plan allows you to make any sort of tax-deductible contribution.

To your question, for both plans – and for other non-New Jersey 529 plans – the earnings on your contributions grow tax-deferred. This allows you to maximize the compounding growth in the account, she said.

“Any withdrawals that are used to fund qualified higher education expenses are tax-free,” she said. “You would not be responsible for the capital gains on the account.”

But if you withdraw for any other purpose, you will be subject to federal income tax as well as a 10% penalty.

Qualified education expenses include tuition, books and supplies, mandatory fees, computers and room and board as long as the student is enrolled at least half-time, D’Agostini saud. Also, you can now access up to $10,000 per beneficiary per year to pay for K-12 tuition at private, public and religious schools.

One advantage offered by the New Jersey plan is that individuals may be eligible for a scholarship of up to $1,500 if they enroll in a New Jersey college or university.

But there are no tax consequences for attending a school out of the Tri-State area.

Also note that you can choose any state’s 529 plan. You’re not limited to New Jersey.

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This story was originally published on Dec. 2, 2019.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.