Elementary, my dear college saver: Tax reform expands 529 plans
If you’re saving for your kids’ education, you may already know about 529 plans, a smart tax-deferred way to accumulate assets for college tuition, room & board and other mandatory post-secondary fees. But under the proposed tax reform bill, 529 plans may become even more useful in the years to come, covering private elementary and high school tuition costs as well as college.
529 plans are tax-advantaged savings plans designed to help families save money for education. Contributions to 529 plans are made on an after-tax basis, that is, you can’t deduct them as you do your contributions to 401(k) plans or traditional IRAs. But, investment earnings compound tax-free; as long as you spend your withdrawals on qualified educational expenses (tuition, room and board, and mandatory fees), you don’t ever have to pay taxes on your investment gains.
Some states also allow you to deduct 529 contributions to reduce your state income tax, though in many cases you’ll have to participate in the 529 plan managed in your state to qualify.
Now for elementary and high school
529 plans were originally conceived to help parents manage the rising costs of college education, but under the new tax plan, these plans would be expanded to cover school expenses for grades K through 12, as well. The Senate tax reform bill included an amendment sponsored by Ted Cruz that would enable families to use 529 assets to cover elementary and secondary education. It passed the Senate on December 7th and is widely expected to be included in the final bill.
The Senate also proposed another change to 529 plans that would allow parents to begin contributing to accounts from the time their children were conceived, rather than when they were born, but this provision was removed from the bill before it passed.
Flexibility has its drawbacks
If enacted, these changes to the 529 program would give families significantly more flexibility in how they save and pay for their children’s education. But some experts say that using 529 plans for early education may limit their benefits.
That’s because the longer you hold assets in a 529 plan, the more chance you have to grow and compound your assets tax-free. By withdrawing funds after only a few years, for private kindergarten or elementary school, you give up the potential for much greater growth in the future.
529 plans have always been a great tool for educational financing. Now you can use them to fund your child’s education all the way from learning the ABCs to post-graduate studies.