Tax Reform Adds Potential Benefits to 529 Plans

Written by David Foreman, CFP® on April 3, 2018

529 plans

Recently, 529 accounts have increased in popularity and received much attention due to their great benefits for college savings. The recent tax reform law, signed into effect in late 2017, has further increased the value of these funds. If you are not familiar with these savings vehicles, a brief recap could be useful. The IRS allows taxpayers to set aside funds in 529 accounts, and, in turn, these funds can be invested. The funds grow tax-deferred and can ultimately be distributed tax-free if used for qualified expenses, including tuition, fees, room and board and others. If distributions are not qualified, you will pay taxes plus a 10-percent penalty on the earnings portion of distributions.

Each state sponsors a 529 plan. You can choose any state’s plan, and the funds can be used at public and private institutions nationwide—not just in-state institutions. Selection criteria should include investment options, fees and state tax benefits.

Until the new tax law came into effect, 529 funds were only for qualified higher education expenses, so K-12 expenses were not qualified. Now, 529 funds can be used for K-12 private school tuition. The maximum that can be withdrawn per beneficiary is $10,000 per year. If you foresee children or grandchildren attending private K-12 school, carefully consider this savings vehicle. The funds potentially can grow tax-deferred for several years before being withdrawn. If not needed for K-12, the funds would still be available for college.

Before proceeding with 529 distributions for K-12, confirm that your state’s tax laws reflect this update. Some states are making updates to ensure that distributions are not subject to state tax on the earnings, while this is not an issue in other states. This update is expected across the board.

In summary, 529 funds have been a valuable savings tool for parents and grandparents, and the added benefit of use for K-12 expenses makes them even more valuable going forward.

*Disclosure

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