What does the expansion of 529 Savings Plans mean for financing private elementary and secondary education and college tuition?
The new Tax Cuts and Jobs Act allows families to use 529 plans to pay up to $10,000 per year in private elementary and secondary education costs. Before, 529 plans allowed families to enjoy the benefit of tax-free compounding on their investments and tax-free withdrawals for qualified higher education expenses, including tuition, room and board, and some computer software and equipment. Many state plans, including the Missouri Most program, also provide a state tax deduction for contributions up to certain limits. Previously, the only program for primary and secondary education costs was the Coverdell Education Savings Account (ESA). It was much more restrictive, with eligibility limitations based on income, small contribution limits and contribution deadlines. And the funds had to be used before the beneficiary turned 30. Changes to the 529 plan provide the same tax-free earnings and benefits as the ESA but without as many limitations, and in most states, they include some state tax deduction for contributions. The new law may change the way families fund college. Some wealthy families may be more likely to ‘superfund’ 529 plans, and other families may choose to ‘park’ their contributions in a 529 for the tax deduction, even if they don’t benefit from the tax-free growth. This practice may cause states to re-evaluate the tax incentives they offer since the state will be providing a deduction without the fees earned from the long-term deposit. In any case, the new law makes an already attractive plan even more attractive for families.
Changes to the Tax Cuts and Jobs Act of 2017 created additional potential opportunities and more choices to help families plan for education expenses. In the past, families were limited in their use of tax-advantaged accounts for primary and secondary education—only $2,000 per student per year was available to deposit to Education Savings Accounts. Today, families can withdraw up to $10,000 per child from 529 plans for K-12 tuition, free from federal income tax. Missouri residents also enjoy a state tax deduction for 529 contributions, up to $8,000 per taxpayer. Families that have built up significant 529 savings may be able to apply for such investments sooner—for K-12 tuition, not just for college. In situations where families expect scholarships or have other resources to fund college expenses, it may be preferable to use 529 funds for elementary or high school. For those who contribute less than $8,000 per taxpayer to 529 plans and are paying for private K-12 education, it may be appropriate to consider increasing contributions to benefit from the state tax deduction if suitable for their circumstances. For all families, it is important to balance their needs for 529 funds at younger ages against a possible greater need for college. The new rules present an additional opportunity of note for grandparents: They also can contribute to a 529 plan! The funds can be used for grandchildren in elementary and high school, or they can complement college savings by parents.