Before exploring a new use for a 529 plan, let’s start with how it has been traditionally used. A 529 is a college investment program, sponsored by state governments and administered by an investment company, as explained by the Cary Citizen in a recent article, “529s and Estate Planning: What’s the Connection?”
The investment options are generally mutual fund portfolios, age-based asset allocations that become more and more conservative, as the beneficiary gets closer to college age. Some plans also offer static portfolios, with predetermined allocations that stay consistent over time.
Withdrawals from a 529 are tax-free, provided they’re used for qualified college expenses. Nonqualified withdrawals are subject to ordinary income taxes and a 10% additional federal tax penalty. The good news is that the eligibility to contribute to a 529 plan isn’t restricted by age or income.