A New Day for 529 Plans

The legislation popularly known as the Tax Cuts & Jobs Act authorized this change: under federal law, up to $10,000 of 529 plan assets can be withdrawn for this purpose annually, for each of the named beneficiaries of a 529 plan account. The funds may be used for tuition at both secular and religious schools. (While 529 plan assets can pay for a variety of “qualified” higher education expenses, tuition is considered the only “qualified” expense at the K-12 level.)^1,2

529 plans are administered at the state level, and at present, less than half the 50 states (and the District of Columbia) treat 529 plan assets in a way that conforms to federal tax law.¹

Some states – such as Utah – have 529 plans ready for K-12 withdrawals. In other states, such as Alabama, laws are on the books specifically barring 529 plan money from being spent on elementary education expenses. Amendments to these types of laws may be years away. Iowa, Maine, and Nebraska have issued notices telling 529 plan participants to refrain from using their accounts for K-12 expenses – for now.^1,2

Then there is the matter of state tax revenue. More than 30 states and the District of Columbia offer tax credits or deductions for 529 plan contributions, but those tax breaks are linked to the withdrawals being used for higher education. Offering those perks to additional taxpayers will reduce the money flowing into state coffers.²

Another issue is the treatment of investment gains in 529 plans. If state law does not sync with federal law, do those gains become taxable at the state level? States need to address this.²

If you live in a state where the rules for the 529 plan are inconsistent with the new federal law, you have 49 other possibilities (50 counting the District of Columbia). You might lose out on your home state’s tax deduction for college saving, but you may gain the freedom to withdraw funds for K-12 tuition.³

You can also open multiple 529 plan accounts in multiple states. Plans in other states may offer different investment choices and allow higher account balances.³

If you have a child with special needs, you will be delighted to know that federal tax law now allows you to direct up to $10,000 a year from a standard 529 plan to an ABLE account. The transferred amount counts toward the annual ABLE account contribution.¹

Families have been hoping for this development since the Achieving a Better Life Experience Act was passed in 2014. This option is scheduled to expire after 2025, but Congress may extend it or make it permanent before the expiration.¹

Meet with a Vermillion Financial Professional, and see how you could potentially use 529 plan funds to pay for K-12 tuition or save for a child with special needs.

Citations.
1 – forbes.com/sites/brianboswell/2018/01/22/your-529-plan-may-not-follow-new-tax-law/ [1/22/18]
2 – time.com/money/5093099/529-plans-k12-expenses-tax-bill/ [1/9/18]
3 – cnbc.com/2017/05/04/10-hidden-benefits-of-529-plans.html [5/4/17]

Disclosure.
Note: The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendation for any individual. Please remember that past performance of investments may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this post serves as the receipt of, or as a substitute for, personalized investment advice from Vermillion Financial Advisors, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed within this newsletter to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.

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