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Put Your Child's 529 Plan to Work as Early as Kindergarten

Pay for tuition at K-12 schools as well as for higher education


The costs of tuition, room, and board at public and private colleges in the U.S. have risen at an average annual rate greater than the rate of inflation over the last decade. As a result, many parents have struggled with the expenses of providing a college education for their children. The advent of the Section 529 plan, a tax-exempt qualified tuition program that permits plan earnings to compound tax free, has helped many parents fund their children's college education. Now, changes in federal tax law implemented by the 2017 Tax Cuts and Jobs Act mean that you can use a Section 529 plan to pay for tuition at public, private, and religious K-12 schools as well as for higher education.

The Basics of Section 529 Plans

You can contribute to a 529 plan regardless of your annual income and your age. Although contributions are nondeductible, investment earnings are not taxed as they accumulate, and account withdrawals to pay qualified education expenses are tax free. Moreover, you can contribute to a 529 plan on behalf of your own child, a grandchild, or another beneficiary. You can fund a 529 plan by investing a lump sum or by making periodic contributions.

What's Changed

Under the new law, tax-free withdrawals for K-12 expenses are capped at $10,000 per year per student. If the child is the beneficiary of multiple 529 plans, the $10,000 may be distributed from one or more of the accounts. If you were to withdraw more than $10,000 for one of your children in a year, the excess would be taxed according to Section 529 rules -- generally as part nontaxable return of principal and part distribution of earnings, subject to both income taxes and a 10% penalty.

If you have younger children and expect to incur K-12 and higher education expenses in the future, it may make sense to use one or more 529 plans to save for both K-12 tuition and higher education expenses. You'll want to give the money you contribute to the plan plenty of time to take advantage of potential compounding. While contributions to a 529 plan are not deductible for federal income tax purposes, they may be eligible for a state tax deduction or credit. Different states have different rules, so check to see if your state provides a state tax benefit for 529 plan contributions.

Be aware also that residents of certain states do not qualify for a state tax deduction for contributing to their 529 plans if the money is being used for K-12 tuition. Again, check to see what your state's laws permit.

Rollovers From 529 Plans

A 529 plan for one named beneficiary can be rolled over tax free within 60 days of distribution to another beneficiary who is a member of the same family. This provision helps in the event the original 529 beneficiary does not need the money for educational purposes or uses only a portion of the account balance.

Investing in 529 plans involves risk, including loss of principal. Before you invest in a 529 plan, request the plan's official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses, and the risks of investing in a 529 plan, which you should carefully consider before investing. You should also consider whether your home state or your beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's 529 plan. Section 529 plans are not guaranteed by any state or federal agency. By investing in a 529 plan outside of the state in which you pay taxes, you may lose the tax benefits offered by that state's plan. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary.

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