You may be wondering how the new tax reform law will affect you and your family. There are several changes that will likely affect you, but I will limit my discussion to only one of the changes: how your family could benefit from a 529 plan.
First, let me explain what a 529 plan is, how it works, and how can it help your family. I will also share how the new law might help you fund your children’s education if you are looking for ways to offer them a better venue for learning, such as a private K-12 school.
A 529 plan provides a flexible, tax-advantage account designed specifically for education savings. The money inside the plan can be used for qualified education expenses for schools nationwide. The benefits of a 529 plan can be broken down into three areas: tax advantages, flexibility on using your money, and investment choices. I will address the first two in this article.
I believe one of the best parts of having a 529 plan is the tax savings. You start a 529 plan by funding it with after-tax dollars (your take-home pay that hits your bank account), but the beauty comes when the earnings grow tax-free (that is, you don’t pay taxes on the interest earned). This is unlike a brokerage account, a bank money market account, or a CD for which you receive a 1099 at the end of the year so you can pay taxes on the interest/gains you earn. When you use 529 funds for qualified educational expenses (historically this has been for college tuition, books, etc.), you don’t pay taxes on the funds you withdraw. Isn’t tax free money a beautiful thing?
Another benefit comes from the flexibility in using the 529 plan. As I mentioned earlier, historically these plans were used primarily for higher education to accredited schools nationwide. When you withdraw the money inside your 529 plan to pay for college expenses, you are using tax free dollars from your earnings. Now, however, with the new tax reform law, you can use the same tax fee dollars to pay for tuition expenses for grades K-12. Gosh things just got better! If your children have grandparents who set up a college 529 or if you had previously set one up, you can now use that money to provide a better K-12 education for your children, tax free! Or even if you haven’t started one just yet, you can fund it now.
Please bear in mind that you can only use up to $10,000 per year, per child for expenses related to K-12. An important reminder is that maximum contribution limits vary from state to state. To avoid gift tax consequences, federal law allows single taxpayers to contribute (gift) up to $14,000 in one year or a lump sum of $70,000 to cover five years. For a couple wanting to contribute, you can double that.
As you can see, between the tax savings and the flexibility of a 529 plan, this could be your perfect option to help save for private education. According to Texas Private School Review, the average private school tuition in Texas is $6,987 for elementary and $10,454 for high school age students. (Compare these averages to the Academy’s day student tuition.)
What if you have not started saving, and you have a small budget? The good news is you can open a 529 with a little as $50 a month or a one-time deposit of $250, depending on the investment provider.
I hope I was able to answer some of your questions about what a 529 plan is and what it could do for your child’s education and your bank account. It truly is a viable option for many families.
–By Jeremiah Pizana, president, LibertyCrown Financial, 512-667-7403
Securities and investment advisory services offered through Royal Alliance Associates, Inc. (RAA) member FINRA/SIPC. RAA is separately owned and other entities and/or marketing names, products or services referenced here are independent of RAA.
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.
Federal tax laws are complex and subject to change. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of tax or legal nature, you should consult with your tax or legal counsel for advice. Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed, and the accuracy of the information should be independently verified.
Note: Investors should consider the investment objectives, risk, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.