529 Plans on the Rise - Advantages and Changes 

 

529 Plans on the Rise

 

 

Tax reform has been a notable topic recently and now that many are beginning to understand some of the major adjustments, let’s take a look at 529 plans.  One of the changes that was enacted allows for $10,000 per person per year for K-12 expenses.  Because of rising costs surrounding education and state income tax breaks, 529 plans will likely become a vehicle in much more demand.

 

 Overview of 529 Plans

 

 

Congress created 529 plans in order to assist families in saving for college education to combat rapidly rising associated costs.  A 529 plan works much like a Roth IRA in the sense that it is funded with after-tax dollars and in turn will grow tax-free, with withdrawals being tax free assuming they are used for qualified educational expenses.  In addition, many states offer some type of income tax deduction or credit for the contribution, a double-benefit.  Also, like an IRA, 529 plans are invested in various instruments in order to achieve a certain level of risk-adjust returns based on the student’s time horizon.  Many plans allow for the plan to be customized across many different allocation options, however; be sure to consult a financial professional in order to be certain the allocation fits the objective.  These plans to vary by state and individuals can purchase a plan outside of their residing state.  Just be aware that by doing so will likely eliminate the state tax incentives for contributing to your state’s plan.

 

Another important benefit to a 529 plan as opposed to other educational savings plans, is that the owner/contributor of the account retains control and ownership.  The owner will list a beneficiary, usually the future student, but is not required to hand over ownership at any particular time.  The owner also has the flexibility to use the funds on a different child if say one received a scholarship or decided not to attend college. 

 

As mentioned before, distributions are tax free if used for qualified expenses such as tuition, books room and board or other technology equipment.  Such equipment might include tables, laptops, printers and other programs necessary for school.  If the distributions are used for something other than a qualified expense, a penalty will apply and the tax deduction will be eligible for recapture.

 

Changes to 529 Plans

 

The Tax Cuts and Jobs Act included a significant change to the old 529 plans.  Distributions up to $10,000 per year per student can now be applied to public or private, elementary or high school.  In addition, it expanded to particular expenses regarding homeschooling and necessary supplies in order to homeschool.  These new changes go into effect for distributions made in 2018 for the qualified expenses mentioned above.  Be sure to consult a financial/tax professional if there are any questions regarding what might be included in a qualified expense. 

 

Advantages

 

The obvious advantage is the tax deduction or credit that most states offer for the contributions as well as the tax-free growth and distributions.  This means that you can help to lower your current state taxable income while also actively funding your child or children’s future educational expenses.

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