By Patrick Amy
The new tax law enacted in late 2017 extended the use of 529s to include not only secondary education, but K-12 as well. This potentially provides some tax savings opportunities for parents (or others) who need to determine if using a 529 makes sense for their situation.
To start, a couple key differences:
- Only private school tuition for elementary or high school are eligible expenses. In secondary education; tuition, room and board, some technology items and required books and supplies are eligible 529 expenses.
- A maximum of $10,000 per year can be used for K-12 tuition annually. There are no annual limits on qualified expenses for secondary education.
There are two primary ways that people can take advantage of the new rule:
- Create a tax deduction. Funnel the money to be used for K-12 private school tuition into a 529 plan. The taxpayer will get state tax benefits for the 529 contribution and can immediately turn around and utilize the funds to pay tuition.
- Benefit from tax deferred growth. Parents, grandparents or others can begin to save in 529 accounts targeted for K-12 private school prior to kids even entering school. If circumstances change, and the child doesn’t attend private K-12, it’s a head start on college funding! You don’t have to specify that this 529 is for K-12 or for secondary education. This tax-deferred growth gets you a discount on future tuition by saving ahead and getting the tax breaks.
This is good news and provides some great tax savings opportunities. However, college costs continue to rise, and we’d encourage people in most cases to start saving for college first. Don’t tap into the 529 targeted for college for K-12 expenses if possible. Also, you want to be careful not to overfund your 529s and be in a position where you have to withdraw for non-educational expenses. This will cost you as you’ll have to pay federal taxes on the account earnings and a 10% penalty. If you have several children, remember that 529 plans can be transferred to another child. While a useful savings tool and tax savings technique, you should use 529s within an overall financial plan.
Every situation is unique and working with a Certified Financial Planner® professional who can help guide you given your goals, current and future cash flow, and circumstances can be beneficial. For help with your particular situation, contact Pat at email@example.com or 913.345.1881.