A 529 Investment Plan is designed to cover future educational expenses such as K-12 education, apprenticeship programs, student loan payments, and college. All states offer a 529 plan, enabling an individual to invest post-tax money and typically make tax-free withdrawals when the money is utilized for qualified educational expenses.
There are two types of investment plans: the Savings Plan and the Prepaid Tuition Plans. State Saving Plans offer more flexibility: they are open to residents of any state, you can shop around for a state plan that is the right for you, and the money can be used at anytime. Prepaid Tuition Plans enable investors to lock in the current tuition rates for an in-state school. These plans are typically limited to state residents, have time limits within which the beneficiary must use the funds, and you could be penalized if the beneficiary attends an out-of-state college.
Here we answer the 4 most common questions about the 529 Plan for Americans living abroad.
1. Can you open and invest in a 529 Plan while living abroad?
It is best to open a 529 Plan before moving abroad as many 529 plans require the account holder to have a US address at the time of creating the account. If you are already abroad, you can ask a trusted family member or friend to open an account for your child and you could send recurring gift contributions to fund the 529 plan.
You can continue to invest in 529 State Savings Plans while living abroad, since most do not require you to be a resident of a particular state. Some states offer state tax deductions as incentive to invest in your own state’s plan. American Expats living abroad who do not file state tax returns would not benefit from the state tax deductions. Many Prepaid Tuition Plans have state residency requirements for the account owner or the beneficiary, so typically this would not be a good fit for Americans living abroad.
2. Can money invested in 529 Plan be used for schools located outside the US?
Yes, withdrawals from a 529 Savings Plan can be used for eligible foreign institutions. These include many institutions in Canada, Mexico, United Kingdom, France, Netherlands, Poland, Sweden, Israel, Lebanon, South Africa, Egypt, Japan, Hong Kong, China, Australia, New Zealand, and the Caribbean. Read more about eligible educational institutions here.
3. Could you be taxed on a withdrawal in your home country?
Yes, the earnings portion of a 529 savings plan distribution may be subject to local taxes in your country of residence. One option to avoid local taxes is to have a family member or friend living in the US open a 529 plan for your child and then send recurring gift contributions to fund the 529 plan. If you already have a 529 Plan, you can transfer ownership of the account to a family member or friend residing in the US.
4. Can a Non-US citizen invest in a 529 plan?
Some 529 plans are open to Non-US citizens if they are US taxpayers and have a US social security number. That said, most 529 plans require the account owner to be a US citizen or to be a “Resident Alien” with a Social Security Number or an Individual Tax Identity Number. The beneficiary needs to be a US citizen or a “Resident Alien” with a Social Security Number or an Individual Tax Identity Number.
Bottom Line
Americans living abroad can continue to invest in a 529 Savings Plan and this money can cover expenses at eligible foreign institutions, but be aware of how your country of residence taxes your withdrawals. For those wanting more personalized advice, I recommend speaking to an international tax accountant.
Dr. Ashwini Bapat is a palliative care physician, Founder and CEO of EpioneMD, which provides virtual advanced care planning and serious illness coaching to individuals and telepalliative care consultation to healthcare organizations. She resides in Portugal.
