A New Day for 529 Plans

By Dave Rao
Wednesday, March 21, 2018

Federal tax reforms lead to new possibilities for these education savings accounts.

Dave Rao

Do you have a 529 college savings plan? Have you thought about opening one? If the answer to either question is “yes,” you should know about major changes that broaden the possibilities for 529 plans, which may give your family some new options.

You may be able to pay K-12 tuition with 529 plan funds. The legislation popularly known as the Tax Cuts and Jobs Act authorized this change: Under federal law, up to $10,000 of 529 plan assets can be withdrawn for this purpose annually, for each of the named beneficiaries of a 529 plan account. The funds may be used for tuition at both secular and religious schools. (While 529 plan assets can pay for a variety of qualified higher education expenses, tuition is considered the only qualified expense at the K-12 level.)

Unfortunately, not all states are on board with this change yet. 529 plans are administered at the state level, and at present, less than half of the 50 states (and the District of Columbia) treat 529 plan assets in a way that conforms to federal tax law.

More than 30 states and the District of Columbia offer tax credits or deductions for 529 plan contributions, but those tax breaks are linked to the withdrawals being used for higher education. Offering those perks to additional taxpayers will reduce the money flowing into state coffers.

Another issue is the treatment of investment gains in 529 plans. If state law does not sync with federal law, do those gains become taxable at the state level? States need to address this.

You can save and invest in another state’s 529 plan. If you live in a state where the rules for the 529 plan are inconsistent with the new federal law, you have 50 other possibilities. You might lose out on your home state’s tax deduction for college saving, but you may gain the freedom to withdraw funds for K-12 tuition. You can also open multiple 529 plan accounts in multiple states. Plans in other states may offer different investment choices and allow higher account balances.

529 plan assets may now be transferred to 529 ABLE (Achieving a Better Life Experience) accounts. If you have a child with special needs, you will be happy to know that federal tax law now allows you to direct up to $10,000 a year from a standard 529 plan to a 529 ABLE account. The transferred amount counts toward the annual ABLE account contribution.

Families have been hoping for this development since the ABLE Act was passed in 2014. This option is scheduled to expire after 2025, but Congress may extend it or make it permanent before the expiration.

Explore your options today. Meet with a financial professional you know and trust and see how you could potentially use 529 plan funds to pay for K-12 tuition or save for the needs of a child with special needs.

Our firm does not render legal or tax advice. This article was written for our firm and provided courtesy of MarketingPro. Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE. Rao Wealth Partners is an independent firm with securities offered through Summit Brokerage Services Inc., member FINRA and SIPC. Advisory services are offered through Summit Financial Group Inc., a registered investment adviser. Summit is an independent broker-dealer with client assets held at First Clearing LLC (a wholly owned Wells Fargo subsidiary). Summit and its affiliates are under separate ownership from any other named entity.