Under Internal Revenue Service code section 529, individual states can sponsor tax-advantaged education savings tools, a 529 savings plan, that is held by an account owner on behalf of a designated beneficiary. These plans, which have been available since 1996, help fund post-secondary education costs. One notable advantage is there are no limits on withdrawals made to cover eligible college expenses. With the implementation of the 2017 Tax Cuts and Jobs Act, account owners can now withdraw up to $10,000 per child, per year, to pay tuition and qualified educational expenses for grades K–12 at public, private, and religious schools.
How will the new tax law affect students and their families?
First, since these savings plans are state-sponsored, account owners should contact their plan administrator before making a withdrawal to fund K–12 tuition. You should ensure the withdrawal is a qualified expense in your specific state. Since it recently went into effect, many states are still in the process of updating their own laws to conform to the new federal tax law.
Second, account owners who plan to fund K–12 tuition using the plan should evaluate their investments because account holders may want to be more conservative in light of the shorter time period. No one should ever feel worried about timing market volatility when a tuition payment is close at hand, so it is important to start a conversation with your financial advisor for assistance.
Third, students and their families need to develop a strategy to fund their education. Funds that are used to pay tuition for grades K–12 will not be available to pay tuition for college. Resources are limited. When structuring your strategy be certain to consider how 529 savings plan affect financial aid awards. According to an article by Saving For College, “A 529 savings plan can affect financial aid for colleges, but the impact is limited and will vary depending on who the account owner is.” There are several state 529 plan websites that are still in the process of updating their laws, and it’s still too early to know how secondary schools will factor in 529 plan assets into their financial aid awards.
While the Tax Cuts and Jobs Act has brought many changes to individuals across the country, it has also provided more families with the opportunity to send their students to secondary schools that they may not have previously been able to afford. For more information on the 529 savings plan and the Tax Cuts and Job Act, please contact Aronson’s tax professionals at 301.231.6200.