529 Education Accounts: Not Just for College Anymore

The new tax laws have brought sweeping changes to both the individual and corporate tax codes.  One of the incentives that has not made many of the headlines is the flexibility added to 529 education accounts.

What are 529 accounts:  These accounts are named after Section 529 of the Internal Revenue Code and they are designed to encourage families to save for the cost of college.  More information can be found here: 529 FAQs

What are the benefits:  The main benefit is that money invested in 529’s will qualify for tax-free distributions for qualified higher education expenses.  There are a number of additional 529 benefits as well.

Example:  Mary invested $10,000 into a 529 account she created for her grandchild Sammy.  By the time Sammy is ready to go to college, her investment has grown to $30,000.  Mary uses all of these funds for qualified higher education costs and therefore the entire balance will be exempt from taxes.  If Mary had simply invested in a normal brokerage account, the $20,000 of gains would have been subject to taxes.

What has changed:  The new tax law allows for tax-free distributions for K-12 private school expenses up to $10,000 per beneficiary per year.  Previously 529’s could only be used for college. This creates a whole new set of planning techniques for those who would like to contribute towards a child’s education, whether they be parents, grandparents or family friends.  If you are assisting your child or grand child with private school fees make sure you are taking advantage of the new tax saving opportunity.

There are many different 529 plans out there.  PA residents receive a state tax deduction on their contributions regardless of which plan they use, however there are a number of other variables to consider when selecting the best plan for your situation.  If you, a family member, or friend needs help navigating educational saving plans, please reach out to us.  We are happy to point you in the right direction.