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New Tax Law Allows 529 Plans to be Used for K-12 Education Expenses

The recently signed Tax Cuts and Jobs Act includes provisions that will expand the potential benefits of 529 savings plans. 529 plans are investment accounts originally designed to help families save for college. Under current law, investment earnings and withdrawals from 529 plans are tax-free as long as the funds are used for qualified higher education expenses.

Presently, qualified higher education expenses means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible post-secondary educational institution, and expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with such enrollment or attendance. Qualified higher education expenses generally also include room and board for students who are enrolled at least half-time. Qualified higher education expenses include the purchase of any computer technology or equipment, or Internet access or related services, if such technology or services were to be used primarily by the beneficiary during any of the years a beneficiary is enrolled at an eligible institution.

With the new tax bill, families will have the ability to use 529 plans for enrollment or attendance at a public, private or religious elementary or secondary school (kindergarten through grade 12). The modified law will permit tax-free withdrawals of not more than $10,000 per-student, per-year for K-12 purposes. The effective date applies to distributions made after December 31, 2017. As under current law, there will not be a dollar limit to the amount of annual tax-free withdrawals that can be applied to qualified college expenses – the dollar limit only applies for K-12.

A provision to include qualified withdrawals for homeschooling expenses was not included in the final version of the bill.

While families will now have more opportunity to save tax-free for private K-12 level education, the shorter time horizon means those users may only achieve a modest federal tax benefit from a limited period of tax-free compounding. The earlier one starts saving, the greater the potential benefit. Time horizon for savings, investment risk-tolerance, and alternate funding sources should be part of any strategy incorporating the new legislation. Those who have been using a Coverdell ESA (Education IRA) to save for private school expenses may want to evaluate a 529 plan as an alternative or addition depending on the withdrawal schedule and family needs.

To learn more about the benefits and features of 529 plans, see this.

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