For those of you who have kids, one thing you worry about is how you will pay for their college education. Investment companies and state governments created an account called “529 Plans” back in 1996 to help ease the burden of college tuition. These are usually categorized as prepaid or savings plans. If you choose a savings plan they are a lot like a 401K or IRA. Prepaid Plans let you pre-pay all or part of the costs of an in-state public college educations.
Tax Cuts and Jobs Act of 2017 effected how the 529 plan will be treated for tax purposes going forward. An amendment to the existing Section 529 Internal Revenue Code was made allowing 529 funds to be used for tuition for those in kindergarten through 12th grade. Earnings on qualified withdrawals are federal tax-free. However, the withdrawals may or may not be state tax-free.
Here are a few things you parents need to keep in mind with the new provisions.
- There is a limit on parent’s ability to take 529 plan distributions for K-12 school expenses. A maximum of $10,000 is allowed each year for those purposes.
- Not all states will necessarily follow the same tax rules regarding K-12 withdrawals as the new federal rules. So depending on what state you live in you might still have to pay state income tax.
The adoption of the new amendment is still uncertain for many states with state tax. Please check with your tax advisor and financial advisor to see how these new changes will affect you and your family.