The Expanded Usability of 529 Plans

Aug

27

August 27 , 2019 | Posted by Brad Schueler |

The Expanded Usability of 529 Plans

As a new school year has already begun for most kids across the nation, it’s a great time to review the benefits to using 529 Plans.  In the past, we would have referred to these as “college savings plans,” however, due to new legislation, there are ways to utilize these accounts that stretch beyond just college.  Let’s spend a few minutes updating you on what your options are.

In September 2017 we wrote an article detailing the increased annual contribution that may be made and deducted to an Ohio 529 Plan.  This expansion not only made it possible to save more for the future college education of a loved one, but also offered a corresponding increase in state tax deduction for contributions made.  These benefits, in addition to tax free growth on invested assets that are used for college, continue to offer a very compelling way to save for postsecondary education.

New legislation in 2018 expanded the use of 529 plans further.  Now, these funds are also able to be used to pay “up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school” per the IRS.   That means grades K-12 private school education is a qualified expense that may be paid for out of a 529 plan.  For families who choose private schools for their children, the opportunity to receive a tax deduction on contributions in addition to tax free growth on their money to help pay for K-12 expenses, may help meaningfully defray these costs.

While these expanded withdrawal options from 529 plans will no doubt help those who wish to use the funds for private school, bear in mind that what hasn’t changed is the amount you are able to fund 529’s with.  The gift tax exclusion remains at $15,000 with the possibility of front-end loading a 529 plan with five years of gifts at one time to get the ball rolling.  With the expanded usability of the 529 plan may come the temptation to use the capital for K-12 education expenses.  While this can be the right decision, it’s important that families weigh that against allowing that money to grow and accumulate tax-free for ever increasing college costs.  According to a USA Today article the average annual costs for college for 2018 is $48,510 for Private tuition, fees, room and board & $21,370 for Public tuition, fees, room, and board.  For those of you who are starting to use your 529 plans to begin paying these expenses, check out this College Advantage blog post describing what exactly makes up “qualified costs.”

The original intent of the 529 plan was tax free growth to help pay for rising college expenses. If a family is able to allow the money in a 529 plan to accrue for this purpose it continues to be a great benefit.  That said, families can now consider using the expanded functionality of 529 plans to pay for private school education, which can be a heavy burden in its own right for a family to carry that has opted to go this direction with the education of their children.  More options means more opportunity to plan out how to best use 529 plans for the benefit of your family.  If you’d like to have a conversation surrounding what this may mean for you, please contact us so we can set up time to discuss this in light of your financial plan.