The cost of sending children to school keeps skyrocketing. It's no wonder in such an environment of educational inflation that tax-advantaged 529 plans are proving popular ways to save for college.
But now, after passage of the Tax Cuts & Jobs Act of 2017, opportunities are opening this year to start tucking away money on a tax-friendly basis for more than just sending your children to colleges and universities across the country.
Part of TCJA's reforms impact 529 plans, allowing such savings accounts to be used with greater flexibility in defraying education bills. In many states, contributions are tax deductible and withdrawals will be tax-free if used for education expenses considered as “qualified” by tax authorities.
“With enactment of the TCJA, 529 plan savings can now be used to help pay for tuition at K-12 schools,” says John Dahlin, director of tax at IFA Taxes.
Technically, 529 plan money can be applied to cover K-12 costs at public as well as private schools. The law's expansion, however, only includes tuition as a "qualified" cost in such cases, Dahlin points out.
Since tuition for sending children to public schools are usually covered by state authorities, he notes that “the benefits are likely to be realized by parents who are sending their children to private schools."
Up to $10,000 a year can be taken from 529 plan savings to pay for K-12 tuition. Currently, items like enrollment fees, meal plans and registration fees aren't considered as qualified K-12 expenses.
On the other hand, taxpaying contributors – including parents and grand-parents – are able to contribute as much as $15,000 a year per child named as a beneficiary of a 529 plan.
Such an educational savings tool has always been popular. In 2017, total investments in 529 plans topped $319 billion, according to the latest figures by the College Savings Plans Network. That was a record and represented a 16% increase from a year earlier.
Of course, sorting through the latest expansion of 529 plan features is likely to require more time and care to maximize tax savings within IRS guidelines. Given all of the new changes, it’s probably worth checking with the tax planning team at IFA Taxes.
“Parents now have another option for helping to defray K-12 tuition costs,” says Dahlin. “Each situation is different, though. Some are going to find it better to use most of their 529 plan savings for college expenses rather than kindergarten through high school.”