Published by Taylor Financial Group
Section 529 Plans are tax-advantaged savings vehicles that have become more popular with middle and upper income families since they were created in 1996. According to the College Savings Plans Network, 529 plans account for $275 billion in assets. Previously, 529 plans were limited to payments for higher education. But, now, there is exciting news. Under the massive tax overhaul that was passed on December 22, 2017, these investment vehicles will no longer be limited to post-secondary education and will now allow a $10,000 annual distribution to pay for K-12 private or parochial education at the elementary and high school levels.
The new limit on state and local tax (SALT) deductions up to $10,000 per return will most likely make these accounts even more appealing than ever, as taxpayers can receive a state tax deduction in certain states. Almost thirty-six states already offer an income-tax deduction or credit for a 529 plan contribution. New York and Connecticut allow a full deduction for a contribution of up to $5,000 for a single filer and $10,000 for a married couple filing jointly. For example, if you live in New York and open a 529 plan and invest $10,000 for your child’s private school tuition, you could avoid $600 in state income tax.
The increased flexibility of 529 accounts is clearly an incentive for parents to send their children to a private school. One possible disadvantage is that these institutions may want to know about the existence of 529 plans when making any financial-aid decisions. Given this drawback, it is more crucial than ever to review your contributions and how it can affect financial aid. Also, you will need to consider that withdrawing money from a 529 plan to pay for private school shrinks the time that the assets can compound tax free for college.
And for parents (or grandparents) with additional funds, consider front loading five years of contributions into the first year, for a total of $75,000 in contributions in the first year for each child or grandchild.
While many parents may feel trapped by the sky-rocketing costs of education, the new tax law provides some expanded options that can relieve some of this pressure.
As always, if you have any questions, give us a call.
Cetera Financial Group, Tax Cuts and Jobs Act of 2017, Explanation, Analysis and 2018 Planning Implications, December 2017.
CNN Money, Private School Parents Get Boost in the GOP Tax Bill, December 2017.
The New York Times, What’s in the G.O.P Tax Bill, and How It Will Affect You, December 2017.
The Wall Street Journal, 529 College-Savings Plans Are even Hotter After Tax Overhaul, January 2018.
Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.
Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera Advisor Networks LLC is under separate ownership from any other named entity.