529 Opportunities (02/01/2018)

The Tax Cut and Jobs Act signed into law in December made an important modification to 529 college savings plans, a widely used college savings vehicle.  529 plans can now be used for qualified K-12 educational expenses. 

Prior to the Act, the 529 plans have been strictly for qualified, college-related expenses.  Now, because of the new law, the plans can be used for “tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious elementary, or secondary school.”  There is a $10,000 a year per student limitation for K-12 expenses is authorized, as opposed to qualified college expenses that have no annual distribution limit.

A 529 plan is a savings vehicle which enables tax free growth.  The number one benefit of the plan is the tax-exempt status if the withdrawals are used for qualified expenses.  Even though the prospect of tapping the funds for K-12 may be appealing for many, the power of compounding over time may still favor leaving the funds invested until college.  Using 529 funds to satisfy a portion of K-12 expenses under certain circumstances may make sense, with the long-term goal of using the funds for college.

Generally, the cost of college is one of the most significant expenses households will face, typically ranging from $80,000-$300,000 in today’s dollars for a four-year higher education.  Because 529s can be switched to other family member beneficiaries or used for graduate school, you will want to look at your entire family when deciding on savings and distributions. If you have overfunded or have family members who will not move on to college, this would be a perfect opportunity to take the qualified distributions during the K-12 period.

Another idea might be converting or combining your Coverdell Educational Savings Accounts (ESA) with an existing or new 529 plan.  ESAs have always allowed withdrawals for K-12 expenses, but you can only contribute $2,000 per year per beneficiary.  Also, households with income over $220,000 per year are completely phased out for making ESA contributions. 

There are several factors to consider when determining whether you should start utilizing an existing 529 or a new 529 plan to fund K-12 expenses.  Like most financial planning, your decision depends on your circumstances, goals and objectives.  

Lisa Dugan

Posted February 1, 2018