In 1996, the 529 plan was created under the Small Business Job Protection Act to give taxpayers a tax-advantaged way to save for their children’s college education. As part of the 2001 Economic Growth and Tax Relief Reconciliation Act, all the earnings in the plan were made completely tax-free if they were used for college. That temporary improvement had an end date of December 31, 2010, but fortunately the Pension Protection Act of 2006 made the tax-free growth feature permanent. The popularity of 529 plans has since grown, and now there is over $275 billion in these plans nationwide.
On December 22nd, 2017, President Trump signed the Tax Cuts and Jobs Act of 2017. One provision of this new tax bill gave the 529 plan another facelift, making these plans even more attractive to parents, grandparents, and anyone saving money for a child’s education. The bill expanded the scope of a qualifying expense to include elementary and secondary school expenses at public, private, or religious institutions. The new law allows an account owner to withdraw up to $10,000 annually to pay for private school tuition and supplies until the beneficiary graduates from high school. Prior to the passage of the 2017 tax bill, any distributions that were not deemed a qualifying college expense would be charged a 10% penalty on the earnings. The ability to use funds for college remains, but the scope of the plan now includes both elementary and secondary school tuition as qualifying expenses which makes these plans even more attractive.
Who Will Benefit?
The changes to the 529 plan are great news for people who have saved money in a plan and would like to be able to use a portion of those funds to pay for education before their child gets to college. It may not make sense with the cost of rising college tuition to take funds for private school tuition, but each account owner should do a thorough evaluation of what makes the most sense for their individual situations.
As with many new Federal laws, it is not totally clear how each state will interpret these new regulations. Each state will have to weigh in on how they will treat the distributions from 529 plans that are used for private school education. According to a recent article in Forbes Magazine, Strategic Insight’s Paul Curley says that over 20 states, including the District of Columbia, will treat withdrawals for K-12 expenses the same as federal law. There is a high likelihood that these laws could change as the individual states have time to digest this news and study the consequences to their bottom line. Before making a withdrawal you should consult with your wealth manager, tax advisor, and the plan sponsor to fully understand the ramifications, if any, of your withdrawal.