Smart investors have a new way to finance K-12 education – and get a tax break doing it. One of the most commonly used savings vehicles when planning for education expenses is the 529 college savings plan. With the passage of the Tax Cuts & Jobs Act in 2018 (TCJA), 529 accounts can now be used to fund up to $10,000 annually of K-12 education, in addition to postsecondary education.
The good news
Prior to TCJA, tax-free withdrawals from these educational savings accounts could only be used for higher education expenses. Now, TCJA expands 529 plans to cover “tuition expenses only” for K-12 education. As always, you can create investment portfolios that can be adjusted based on risk tolerance and timeframe. But now, you can withdraw the money and fund your beneficiary’s elementary or secondary education with tax-free growth on those 529 earnings.
The fine print
It should be noted, that these tax-free withdrawals from 529 accounts must be used to fund qualified expenses at a private or religious elementary or secondary school (K-12). Homeschool expenses are not included.
Qualified expenses include no more than $10,000 of tuition per year, per beneficiary. Note, this differs from qualified postsecondary education expenses which includes tuition, fees, books, supplies, and equipment.
Additionally, educational plans are sponsored by state governments, which means that states don’t necessarily have to conform to federal code. Regardless, you can always take advantage of federal tax-free withdrawals for elementary and secondary education tuition, but the withdrawal may not qualify for state tax benefits.
And as always, you’ll want to avoid overfunding a 529 account and accumulating assets that are greater than qualified education expenses. Withdrawals made for non-qualified expenses will incur a 10% penalty on any gains. Gains will also be taxed at ordinary rates and you may have to pay back any state income tax deductions you previously claimed. It is important not to overfund the plan!
Consider Using Your 529 for K-12 if You…
- Desire to fund both private school and postsecondary education for your beneficiary.
- Have already fully (or over-) funded postsecondary qualified expenses.
- Have room to make additional contributions without going over the contribution limit of you 529 plan.
- Live in a state that has accepted the new federal code.
- Have a beneficiary who will not attend college.
Phone an expert
There are many other tax advantages that can come from the expanded 529 plan, but we’ll spare you of the nitty-gritty financial jargon. We know not everyone enjoys this stuff as much as we do.
Okay, we can’t resist… one quick example! 529 contributions in some states may be tax deductible regardless of the amount of time they have spent in your 529 account. That means even if you have the means to pay tuition out of your cash flow, you may be able to contribute to a 529 plan, then immediately withdraw it for tuition and take the tax deduction.
Are you prepared to take full advantage of the latest 529 changes? FJY Financial can help you support your beneficiary’s education and reap the tax rewards.