Learn about using 529 plans for more than just college savings.
In late December 2017, the President signed new federal tax legislation that changed how 529 accounts can be used. Though individual states may have variations in how they treat these adjustments, one of the most impactful changes is that families can now pay tuition for primary and secondary education using the funds in a 529 plan.
Families can now use 529 plans to save and pay for tuition at private, public and religious elementary and secondary schools. The expansion of the “qualified higher education expenses” language means that families can contribute up to $10,000 (per year, per beneficiary) in connection with enrollment or attendance at these primary and secondary schools.
With the average annual cost of private school tuition at $10,671, according to Private School Review, that $10,000 annual withdrawal could make a clear impact on your family’s education expenditures.
529 plans were originally established to help families pay for qualified higher education expenses by offering tax-deferred investment growth and tax-free withdrawals. Tax-free withdrawals for post-secondary education costs still remain unlimited, as long as they don’t exceed the amount of post-secondary qualified expenses incurred for the beneficiary.
At this time, residents of 21 states are eligible for an income tax deduction or credit for 529 plan contributions used to pay for college or K-12 tuition, subject to variation depending on where you live and how much you contribute. And not all states are on the same page – in some states, 529 plan distributions used for K-12 expenses may still be taxable at the state level. Please consult with your tax advisor to best determine how each state may be treating the expenses associated with K-12 education.
Earnings in 529 plans are not subject to federal tax and in most cases state tax, as long as you use withdrawals for eligible college expenses, such as tuition and room and board. However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.