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Using 529 Plans to Pay for Private K-12 Expenses

The Tax Cuts and Jobs Act introduced legislation that could be beneficial to those who currently have 529 plans in place to pay for college.1 Under the new law, up to $10,000 of 529 plan assets can now be withdrawn for K-12 tuition costs for each of the named beneficiaries of the plan. There is one caveat: since state entities are responsible for the administration and issuance of these plans, all states have not gotten on board to comply with the new change.

Dealing With the Issues

There are some issues surrounding this change. In states that have not been able or do not want to comply, some factors could interfere. First, since this is a legislative directive, certain states will have to amend their laws and tax codes. This could take years to accomplish to allow these types of withdrawals. Additionally, any associated tax breaks would cut the amount of revenue the state earns from these plans. This leaves room for another question – if there are any investment gains, will they become taxable at the state level?

While there are additional questions to be raised and answered, there are some positive benefits in making this plan available at the K-12 level. Based on the current law, 529 plans can also be transferred to 529 ABLE accounts to assist with education expenses for special needs children.

Areas of Concern

Additional clarity is needed to fully understand what can and cannot be done under this law, as it affects each state differently. An area of concern is account holders taking a significant financial risk when attempting to withdraw money as the ideal would be to keep all the current benefits of saving in this type of account while utilizing those funds for the K-12 tuition.

Although 529 plans were developed under the federal law, many states have developed their own versions of the 529 plan. The inconsistencies between the two can cause many problems, such as families having to pay back any tax credits they have received. This also affects the deductions. As states are in charge of their own plans, the impact affects each one differently. Also, as states stand to lose money by allowing these types of withdrawals, how will they recoup the revenue lost?

Note for California taxpayers: The California Franchise Tax Board (FTB), in its role as the State's tax authority, has determined that current California State tax law does not conform to the new federal tax treatment. This means that, for California taxpayers, the earnings portion of any distribution from any 529 plan to pay for tuition expenses at a public, private or religious elementary, middle, or high school or any amount rolled-over from a qualified tuition program to an ABLE account may be subject to California income tax and an additional 2.5% California tax.2 *

Is this a good idea? For some families who have front-loaded money into a 529 account at the child's birth, this could help save thousands based on the ROI each year. Also, if used as a just-in-time pass through by contributing to the plan, getting the tax benefit and immediately withdrawing to pay for the tuition. While some states do not allow this, some do.

As this continues to develop, it is important to follow what each state is doing in response to the change. They could add income restrictions, cap deductions, and have a number of implications that would affect the benefits of using this to pay K-12 tuition.

If you have specific questions about how this may effect you and your family, please let Enduro Financial know.  We would love to coach you through this process.  

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1 https://waysandmeansforms.house.gov/uploadedfiles/tax_cuts_and_jobs_act_section_by_section_hr1.pdf

2 https://www.scholarshare529.com/buzz/?id=1043

*State tax treatment of withdrawals for K-12 tuition expense is determined by the state where you file state income tax. Please consult a qualified tax advisor for further guidance for your particular situation.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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