The SECURE Act expands the definition of qualified higher education expenses to include student loan payments and costs of apprenticeship programs, leaving more options for families. The funds in a 529 can also be used to pay for room and board, books and supplies, special services, and computers and related equipment.

As to room and board. If parents own a condo they can charge a rent which could come out of the 529 plan as a qualified expense. However, that rental income must be reported as rental income would normally be reported.

The 529 requires the owner to name a beneficiary and record the beneficiary/s social security number and date of birth at opening (can be anyone). A 529 plan beneficiary must be a U.S. citizen or resident alien with a Social Security Number or Individual Taxpayer Identification Number.

The account will have an owner, a successor owner (assumes control in the event of the original owner's untimely death) and a beneficiary.

There are no tax consequences or penalties when a 529 plan beneficiary is changed to a member of the beneficiary's family. Qualified family members include the beneficiary's:

1. Spouse
2. Son, daughter, stepchild, foster child, adopted child or a descendant
3. Son-in-law, daughter-in-law
4. Siblings or step-siblings
5. Brother-in-law, sister-in-law
6. Father-in-law, mother-in-law
7. Father or mother or ancestor of either, stepmother, stepfather
8. Aunt, uncle or their spouse
9. Niece, nephew or their spouse
10. First cousin or their spouse

Beneficiary change forms can be found on a 529 plan's website. Depending on the 529 plan, the beneficiary change form may be completed online or printed and submitted by mail.

529 plan account owners may now withdraw up to $10,000 tax-free for payments toward qualified education loans. However, there is no double-dipping when it comes to federal education tax benefits. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.[1]

The law provides a new way for grandparents to help a grandchild pay for college without affecting financial aid eligibility. Normally, distributions from a grandparent-owned 529 plan are reported as untaxed income on a student's Free Application for Federal Student Aid (FAFSA). A student's financial aid package may be reduced by up to 50% of the value of untaxed income. For example, if a grandparent withdraws $10,000 from their 529 plan to pay a grandchild's college expenses, it could reduce the grandchild's financial aid eligibility by as much as $5,000.

Now, grandparents are able to avoid a negative impact if they wait to take a 529 plan distribution until after the grandchild graduates to pay down their student loans. Assets held in a grandparent-owned 529 plan do not affect financial aid, and since the 529 plan distribution was taken after the student graduated, there is nothing to report on the FAFSA.[2]

Some states offer asset protection by statute which means the assets that are moved into the 529 would be off the table for creditors but this protection and the extent of it is state by state.

 Some of our favorite states for protection and there are no residency requirements:

1. South Dakota (S.D. Codified Laws § 13-63-20) but no exemption if within one year of filing bankruptcy.
2. Virginia (VA. Code Ann. § 23-38.81) one of the best
3. Kansas (K.S.A. § 60-2308 (f)(2)-(4)) Caveat – beneficiary must be lineal descendant of account owner no protection of contributions made within 2 years prior to filing bankruptcy and judgment for claims only protected up to $5,000 per account owner.
4. Kentucky (Ky. Rev. Stat. § 164A.350).
5. Colorado (C.R.S. 23-3.1-307.4)
6. Florida (Fla. Stat. § 222.22)
7. North Dakota (N.D. Admin Code 12.5-02-01-06)
8. Pennsylvania (24.P.S. § 6901.309.2)

 Other Uses:

Regardless of your age, you can set up a Section 529 plan for yourself to fund educational expenses now or in the future. You can use the money in a 529 plan to upgrade your skills by just taking a few classes at a qualified college or trade school, or working towards a degree or advanced certificate. You can apply the funds for tuition, books, fees and even a computer, as long as it is used to further your studies.

In the event the beneficiary (even yourself) becomes disabled, the owner may make a penalty free (but taxable) distribution to the support the disability and care needs of the beneficiary. In other words, if you use 529 money not on educational expenses but toward the care and support of the beneficiary (again may be a spouse), and you can demonstrate that they have a disability that prevents them from being gainfully employed, the IRS will waive the 10 percent penalty (though you will still be liable for the income tax portion). As a senior this might be another tool for long term care since there is no age limit on a 529 plan and no penalty for a verifiable disability.

Funds withdrawn to support a beneficiary's needs for long term care/disability would pay ordinary income only and no penalties (10% Federal of Ca. 2.5%) on the growth portion of the funds which is the harvest not the seed. When you think of how hard it may be to qualify someone for long term care when they have health issues another back-up might be to consider using a 529 since the beneficiary can always be changed.

You can also withdraw funds for the owner's use tax on the growth would be ordinary income tax, 10% federal penalty and 2.5% Ca. state penalty (check your specific state). However, you were able to grow funds tax deferred.

Therefore, there is qualified distributions (no taxes) which is for eligible education. Partial qualified distributions for long term care and disabilities and then non-qualified distributions which is only on the growth portion according to your ordinary tax bracket with the penalties. However, if you factor that you received growth tax deferred and are now paying it at ordinary income it become almost like an IRA (but with the penalty) but no Required Mandatory Distributions (RMDs) at 72 years old; you can keep building up the harvest tax deferred.

For example, if $50,000 is contributed to a 529 plan, where it grows to $60,000 over time, and an non-qualified withdrawal is made for the entire amount, the $10,000 gain is taxable  at your ordinary income tax rate and a 12.5% penalty on the $10,000 is applicable (i.e. $1,250. In addition, the possibility of a recapture of any state tax deductions or credits taken could occur if you live in a state that provides for such deductions; the state of California does not as well as several other states.

[1] https://www.forbes.com/sites/katiepf/2019/12/21/you-can-now-use-a-529-plan-to-repay-student-loans/#3eb155db4aab

[2] . Id.