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Section 529 Plans Can Now Be Used for Private Elementary and High Schools

Section 529 Plans Can Now Be Used for Private Elementary and High Schools

If you’ve been a long-time fan of Section 529 accounts, then you know that they’re a great way to save money for a child’s college education. The funds that get deposited in 529s are able to grow tax-free and be dispersed without a tax impact as long as they are used for qualified college expenses. But with the passage of the Tax Cuts and Jobs Act (TCJA), the popular accounts have become even more valuable for those looking for tax-advantaged ways to pay for education. The new tax law permits the funds in a 529 plan to be used to pay for schooling before the college years, including elementary and secondary schools.

For the uninitiated, Section 529 plans offer highly flexible options for paying for educational expenses. There are two types of these accounts available, with one offering the ability to prepay for tuition and avoid costs increasing, and the other being a more straightforward savings account. Under the prepaid plans, investors purchase shares when a child is young, based upon the current cost of attending a specific school. When the child is ready to go to college, the shares are valued at whatever the current costs are, regardless of how much tuition or other expenses have gone up in the years between. The straight savings plans offer the opportunity for a greater return on an initial investment, but are not tethered to any particular tuition amount or cost. Most of the straight savings plans provide an investment strategy that adjusts the account’s level or risk and aggressiveness with the proximity to when the funds are needed: the fund will invest more aggressively when the child is far from needing the funds, then become more conservative as they get closer to college age.

Section 529 plans are affiliated with different states, and as such their contribution limits are controlled by that state. Careful planning provides the opportunity to fully fund college tuition with no tax impact on the growth in funds deposited into the account over the years, as long as they are withdrawn for qualified expenses.

With the tax law expanding these benefits to tuition for schooling prior to college, parents who wish to send their children to private or religious schools will be able to get the same tax-free advantage, though tax-free withdrawals for pre-college schooling are limited to $10,000 per year.

Taking advantage of the Section 529 plan is easy to do. The accounts are simple, and have few restrictions, though they are subject to the annual gift tax exclusion, which is $15,000 per recipient for 2018, or $30,000 for joint gifts from a married couple. But there is the opportunity to play catch-up if you haven’t been using a 529 previously: a special rule permits a one-time chance to deposit five years’ worth of gifts ($75,000 for a single, $150,000 for a married couple) into a plan without triggering a gift tax.

The new rule will provide a real benefit for many people looking to provide tax-advantaged funding for children’s education. It’s a good idea to talk to your tax pro about this  important change in the law.

Spencer Wilson writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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