Expanded Use of 529 Savings Plan Under the New Tax Rules

529 College Savings Plans were originally designed as investment accounts to save for a beneficiary’s future higher education costs. Prior to the new tax bill, withdrawals from a 529 would only be qualified (tax-free earnings and withdrawals) if used at an eligible institution, defined as a college, university, vocational school, or postsecondary institution eligible to participate in federal student aid programs administered by the U.S. Department of Education.

Under the Tax Cuts and Jobs Act (TCJA), 529 plan distributions of up to $10,000 per student per year can now be used tax-free for elementary and secondary school expenses for public, private, or religious schools. The $10,000 maximum applies on a per-student basis, not on a per-account basis.

While earnings on qualified withdrawals for K-12 expenses are federal tax-free, the withdrawals may or may not be state tax-free. According to Strategic Insight’s Director of College Savings Research Paul Curley, over 20 states will treat K-12 expenses the same as federal law, though some of those states are announcing that legislation is still required. Be sure to contact your respective program to determine how they will treat withdrawals used for K-12 expenses.

For those who are planning for both private K-12 and college, consider the following:

  • For parents with a 529 plan earmarked for college, there is an opportunity cost to use those funds earlier for private school, specifically you miss out on future years of tax-free growth. There is nothing more powerful in finance than compounded tax-free earnings followed by tax-free withdrawals. The 529 has these features and is an ideal long-term savings account — it should be used as such first and foremost.
  • With a shorter time horizon, you might not see much of a federal tax benefit from using a 529 to pay for elementary or secondary school, but you could be eligible for a state tax deduction on your contributions (currently over 30 state 529 plans allow for a tax deduction for 529 plan contributions).
  • If you are behind on college savings, the tax change will not be a silver bullet to solve your savings gap and allow you to afford private K-12. On the other hand, if you have sufficient funds set aside to cover college costs already, the provisions of this act may be more attractive.
  • If you already have a 529 plan to save for college, consider opening a separate account to save for K-12. This will help you keep better track of each goal, and select the appropriate investments based on your withdrawal schedule.

The TCJA and the 529A (ABLE) account:

The final TCJA legislation also makes a few adjustments to 529A plans – also known as ABLE accounts, which provide tax-free distributions for disabled beneficiaries for qualified expenses including college, job training, and healthcare and financial management expenses. Specifically, the new rules permit money in a 529 plan to be rolled over to a 529A ABLE account without any non-qualified distribution penalties, as long as the 529A beneficiary is the same person (or a member of the same family) as the original 529 plan account.

However, even rollovers from 529 plans to 529A ABLE accounts will still be restricted to (and count towards) the annual contribution limit for ABLE accounts, which is the annual gift exclusion (rising to $15,000/year in 2018). Thus, large 529 plan balances may take years (or even decades) to slowly siphon off to a 529A plan if the child becomes disabled after accumulating significant college savings.

As with most financial planning matters, what will ultimately benefit your family most will be unique to your specific situation. Work with your financial advisor to discuss the best strategy for your family’s circumstances.

Barbara M. Ollinger, CFP®

Barbara joined HTG in 1998. As a senior advisor, she counsels clients on their financial planning concerns and designs and implements investment portfolios to meet her clients’ objectives.

Barbara has been a CERTIFIED FINANCIAL PLANNER™ practitioner since 2007. She received her BS in Business Administration from the University of Maine and her MBA from the University of Connecticut.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Receive our latest features, news and helpful advice