Significant Changes in 529 Plan Rules May Benefit Families
The new tax law passed at the end of 2017 included a provision to allow families to pay up to $10,000 per child of K-12 expenses with a 529 plan each year. In the past, 529 distributions could only be used for college expenses. This change could have a significant impact on families as students who already have established 529 pans for their benefit can withdraw funds, tax free, to pay the cost of current tuition. It is also an expanded opportunity for parents, grandparents, or other family members to save more tax efficiently for tuition. Some of the highlights of a 529 plan are:
- No gift tax for contributions made to a beneficiary of up to $15,000 ($30,000 per couple) per year
- The opportunity to contribute up to five years of gifting on one year $75,000 ($150,000 per couple)
- No income phase-out limits
- Deferral of federal taxes on any earnings growth
- No federal tax on withdrawals used for qualified post-secondary school and now includes up to $10,000 of tuition for K-12 expenses
- No mandatory distribution age; keep account balance indefinitely
- Account owner able to reassign account to another eligible student with no time restriction for making the change
- Account owner to maintain control of assets
What is the potential impact in dollars? Let’s say a family earning $150,000 per year wants to start saving for private high school when their child is a newborn. They contribute $300 each month to a 529 plan where their earnings grow tax-free over the next 14 years. Assuming an annual investment return of 6%, they would be able to save $75,654. If the same family saved in a taxable account, they would only end up with $67,315 ($8,339 less). (Source: https://www/savingforcollege.com)
We encourage families to work with their financial planner or CPA to determine how this specific strategy would impact their personal situation. We encourage you to explore how these tax-favored savings accounts be a way to provide your child a place to grow.
This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed.