A New Day for 529 Plans
Federal tax reforms lead to new possibilities for these education savings accounts.
Provided by Philip Lockwood
Do you have a 529 college savings plan? Have you thought about opening a 529 plan account? If the answer to either question is “yes,” you should know about two major changes that broaden the possibilities for 529 plans. They may give your family some new options.
You may be able to pay K-12 tuition with 529 plan funds. The legislation popularly known as the Tax Cuts & Jobs Act authorized this change: under federal law, up to $10,000 of 529 plan assets can be withdrawn for this purpose annually, for each of the named beneficiaries of a 529 plan account. The funds may be used for tuition at both secular and religious schools. (While 529 plan assets can pay for a variety of “qualified” higher education expenses, tuition is considered the only “qualified” expense at the K-12 level.)1,2
Unfortunately, not all states are on board with this change yet. 529 plans are administered at the state level, and at present, less than half the 50 states (and the District of Columbia) treat 529 plan assets in a way that conforms to federal tax law.1
Some states – such as Utah – have 529 plans ready for K-12 withdrawals. In other states, such as Alabama, laws are on the books specifically barring 529 plan money from being spent on elementary education expenses. Amendments to these types of laws may be years away. Iowa, Maine, and Nebraska have issued notices telling 529 plan participants to refrain from using their accounts for K-12 expenses – for now.1,2
Then there is the matter of state tax revenue. More than 30 states and the District of Columbia offer tax credits or deductions for 529 plan contributions, but those tax breaks are linked to the withdrawals being used for higher education. Offering those perks to additional taxpayers will reduce the money flowing into state coffers.2
Another issue is the treatment of investment gains in 529 plans. If state law does not sync with federal law, do those gains become taxable at the state level? States need to address this.2
Keep in mind that you can save and invest in another state’s 529 plan. If you live in a state where the rules for the 529 plan are inconsistent with the new federal law, you have 49 other possibilities (50 counting the District of Columbia). You might lose out on your home state’s tax deduction for college saving, but you may gain the freedom to withdraw funds for K-12 tuition.3
You can also open multiple 529 plan accounts in multiple states. Plans in other states may offer different investment choices and allow higher account balances.3
Additionally, 529 plan assets may now be transferred to 529 ABLE accounts. If you have a child with special needs, you will be delighted to know that federal tax law now allows you to direct up to $10,000 a year from a standard 529 plan to an ABLE account. The transferred amount counts toward the annual ABLE account contribution.1
Families have been hoping for this development since the Achieving a Better Life Experience Act was passed in 2014. This option is scheduled to expire after 2025, but Congress may extend it or make it permanent before the expiration.1
Explore these possibilities today. Meet with the financial professional you know and trust, and see how you could potentially use 529 plan funds to pay for K-12 tuition or save for a child with special needs.
Lockwood Financial Strategies LLC
Philip Lockwood – President
3100 Ingersoll Ave. Des Moines, IA 50312
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Securities offered through Parkland Securities, LLC, member FINRA (FINRA.org) and SIPC (SIPC.org). Investment Advisory services offered through SPC, a Registered Investment Advisor. Lockwood Financial Strategies, LLC is independent of Parkland Securities, LLC and SPC
1 – forbes.com/sites/brianboswell/2018/01/22/your-529-plan-may-not-follow-new-tax-law/ [1/22/18]
2 – time.com/money/5093099/529-plans-k12-expenses-tax-bill/ [1/9/18]
3 – cnbc.com/2017/05/04/10-hidden-benefits-of-529-plans.html [5/4/17]