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Changes to 529 Plans Offer Advantages

A 529 college savings plan allows you to save for your child's education with a savings plan or prepaid tuition plan and withdraw the funds tax-free when needed. If you are already contributing to a 529 plan, with the reduced deductions in the new 2018 tax law, you may want to increase your contributions—or even create a second 529 account—to offset higher state taxes. If you haven’t yet opened a 529 account, this year’s important changes in tax and 529 regulations have made them an even more valuable option for parents of school-aged or college-aged children. Here are some of the old and new benefits of a 529 plan.

K-12 Tuition Can Now Be Funded With a 529 Plan

All 529 plans were originally created to let you to save and invest for your child’s college education while paying no federal tax on qualified withdrawals. The good news is this benefit has now been expanded: you’ll be able to withdraw up to $10,000 per year per student for elementary, middle and high school education expenses if your child attends a private or religious school. And, if you’ve already been saving for K-12 with a Coverdell ESA, you can roll over that account to a 529 plan without tax consequences.

Saving by Off-Setting State Taxes

The new 2018 tax law limits deductions for your state income and property taxes to $10,000, so you might find yourself paying more state tax this year. But if you live in one of the 34 states that offers a state tax deduction for contributions to a 529 plan, you can lower your state taxes by contributing more to your 529. In most states, you have to be enrolled in that state’s own plans to take the deduction, but several states, such as Utah, Vermont and Indiana, allow you to deduct contributions from any state plan. If you live in one of the several states whose 529 plans include state tax credits, you could also find yourself paying considerably less.

Turbo-Charging the Benefits for Younger Children

A 529 plan allows “front-loading,” a term for making up to five years of contributions at once. This not only allows you to catch up for a child already in elementary or secondary school, it also allows you to maximize state tax deductions or credits. And anyone can make contributions to your child’s 529 plan. Friends and relatives can each contribute up to $15,000 per recipient. They can also front-load up to five years of contributions while maximizing their own tax savings. Additionally, if they make direct payments to services provided for beneficiaries’ tuition or medical expenses, these expenses would be tax-free, even though the costs surpass the annual gift tax exclusion. (For related reading, see: Why You Should Front-Load Your 529 Plan.)

New Benefits for Special Needs Students

The new tax law allows assets in 529 accounts to be transferred to ABLE accounts without any penalties as long as they are transferred by 2025. ABLE plans, named for the Achieving a Better Life Experience Act, are designed to provide tax-favored savings for people with disabilities without limiting their access to benefits such as Medicaid, Social Security disability insurance (SSDI) and Supplemental Security Income (SSI). The annual contribution cap for ABLE plans is $15,000, and an ABLE account can reach $100,000 without affecting SSI benefits. You can also make tax-free withdrawals from ABLE accounts when paying for expenses such as housing, legal fees and employment trainings.

Transferring Unneeded Funds

Given all the benefits brought by 529 plans, you might already have substantially contributed to an account. What if your child decides not to receive the planned education or is able to pay for it through scholarship? If you no longer need the account for the child it was created for, you can change the plan’s beneficiary to another family member, saving you the income tax on 529 earnings and the 10% federal penalty you pay if you withdraw money for non-educational purposes.

Every parent and grandparent should consider opening one or more 529 accounts for their children’s education. There is no limit to the number of plans you can contribute to or the number of accounts you can be open for any child, so study up to determine which plans make the most sense for you. Each state’s rules are different so, like your kids, you’ll want to do your homework. Then contribute on a regular basis over time, through market ups and downs, to benefit from dollar cost averaging and to watch your interest compound and your child’s educational opportunities grow.

(For more from this author, see: Saving for College? Be Educated About Your Options.)


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