You've heard the phrase 529 college savings plans before, but did you know they aren’t just for college anymore? New tax laws effective in 2018 expanded the use of 529 plans so they can be used for kindergarten through 12th grade (K-12) tuition as well. Even though saving for a child’s precollege education means a shorter timeline for account balances to grow, there are some circumstances when using funds earlier makes sense.
When sooner might be better: doing your homework
Whether you’re hearing about the new opportunity to use 529 education savings plans for K-12 tuition for the first time or you’ve been considering it for a while, you’ll want to do a bit of homework before making any changes.
To start, we suggest you check out the following scenarios for your kids’ futures. Do any of these sound familiar?
- You plan to send your children to a K-12 private, religious, or public school that charges tuition
- Your kids are young enough for 529 plan investments to grow before withdrawals will be needed for schooling
- 529 plan account balances are big enough to fund both K-12 and college education
- A two-year degree or community college may be enough to start your kids’ careers
- Multiple family members plan to make contributions
What the new tax law means for 529 plans
- The definition of qualified higher education expense was expanded to include primary and secondary school tuition at public, private, and religious schools
- Up to $10,000 in annual withdrawals are now federally tax-free for K-12 tuition
- States can also offer income-tax deductions when using accounts for K-12 tuition; more than 30 states have implemented the law
5 things to consider when using savings for K-12
If you said yes to any of the items in the list above, using a 529 plan for K-12 tuition might make sense for your family. Since savings’ timelines are shorter, you’ll want to think about taking a different approach to contributions, investments, and withdrawals.
- Start early and involve everyone. It’s never too early to start a 529 plan for a new little beneficiary. Anyone in the family can open an account for a child, changing the beneficiary to another family member later, if needed. And anyone can donate to your 529 account, including grandparents, cousins, and friends of the family.
- Tally the tax savings. The tax savings for those that contribute to 529 plans can be substantial and include gift tax, estate tax, and income-tax incentives. Estate taxes, in particular, may be an important consideration for grandparents as they do their future planning, for example. Additionally, while all 529 plans can now benefit from federal tax relief when savings are used to pay for K-12 tuition, more than 30 states allow state tax savings as well.1
- Rethink investments. Many 529 plans suggest using portfolio glide paths that align with expected college enrollment dates. If you decide on earlier withdrawals from the account to use for K-12 tuition, you’ll want to revisit the asset allocation strategy to make sure it matches your new timeline. Your financial professional can help you assess what changes might be needed.
- Front-load contributions. Invest as much as possible up front when using 529 plan savings earlier. Since account balances will have less time to grow, a large contribution at the beginning may appreciate faster than smaller monthly gifts. Additionally, parents and grandparents can make five years’ worth of contributions in a single year without triggering federal gift taxes.
- Consider adding accounts. Your family may benefit from opening multiple 529 accounts, especially if you plan to use some of the savings for K-12 tuition. Some factors to consider in this decision are whether or not you already have a 529 plan in a state that has implemented the new tax law, the number of children in your family, and future plans for education.
When you’ve done all your homework, does using a 529 plan for K-12 tuition make sense for you? The answer depends on the needs of your family. Your financial or tax advisor can help you review the questions above in more detail, discuss the impact of the new tax laws, provide guidance around 529 plan investment decisions, and answer any other questions you may have about using your 529 plan for an earlier education.
1 Please check to determine if your state offers a similar state tax benefit for K-12 education.
State laws and treatment may vary. Earnings on nonqualified distributions will be subjected to a 10% federal penalty tax. Please speak with your tax advisor for more information.
Consult your financial, tax, or other advisor to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances.