The new tax bill, signed into law on December 22, 2017, has impacted a number of investment vehicles that may benefit many of us. One significant change to the 529 Plans is the ability to use these funds to cover private elementary and secondary school expenses. As a reminder: A 529 plan is an education savings account that was introduced in 1996 to help taxpayers save originally for college expenses for a designated beneficiary.
To use the new tax change that allows $10,000 eligible to be eligible for elementary and secondary schools, it is best to start investing early – even before the little ones are born. You can set-up a 529 account for yourself and then amend the beneficiary later for a family member. You can have family members contribute into the account for birthdays, baptism and other events that they want to give a gift. Certainly a lot better than the old savings bonds!
The benefit of these accounts is generally long-term which makes these accounts better suited for college expenses, but with planning and generous family and friends the new increased option may also be a benefit to you and your loved ones.
These plans, named for Section 529 of the federal tax code, are federal tax exempt and often have tax benefits at the state level for in-state residents. This only applies to states that have an income tax. Any U.S. citizen or resident alien at least 18 years or older can open a 529 account. Usually, the beneficiary is a child, grandchild or younger relative. However, there are no age limits for opening a plan. An adult can also open a 529 plan to save for his or her own higher education costs.
Nearly every state now has at least one 529 plan available. It’s up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest and always explore your own state plan as additional tax savings may be available.
There are certain benefits that 529 plans offer in regard to taxes. Although your contributions are not deductible on your federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary’s education come out federally tax-free. The tax-free treatment was made permanent with the Pension Protection Act of 2006.
Your own state may offer some tax breaks as well (like an upfront deduction for your contributions or income exemption on withdrawals) in addition to the federal treatment. There also may be a benefit to investing in your own state’s 529 plans (depending on which state you live in). If you don’t get any benefits from your state, you have the pick of every 529 plan that’s available…so it is best to compare each state’s plan.
After exploring the potential tax breaks for your own state, take a look at the following 2 state offerings: Utah and West Virginia. These plans use funds from our investment partner Dimensional Fund Advisor.
Parents or grandparents who want to give a significant amount at once can also front-load the 529 plan without triggering a gift tax. Individual gifts are typically capped at $14,000 per child per year, but an IRS rule enables the transfer of up to five years’ worth of gifts to a 529 account. This will enable the fund to start accumulating earlier with the benefit of using these funds when or if the child attends a private elementary or secondary school.
A 529 plan can provide a very easy hands-off way to save for college and now elementary and secondary school expenses. Once you decide which 529 plan to use, you complete a simple enrollment form and make your contribution (or sign up for automatic deposits). Then you can relax and forget about it if you like. The ongoing investment of your account is handled by the plan, not by you. Plan assets are professionally managed either by the state treasurer’s office or by an outside investment company hired as the program manager.
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