Your 529 Savings Plan Can Help Pay Tuition
A 529 plan is an investment account designed to encourage families to save for future college expenses. Parents can invest after tax dollars on behalf of a child for the purpose of education. Money contributed to the 529 is not tax deductible, but any growth in the investment is tax free. 529 plans have no income limits. Money invested in 529s must be spent on “qualified education expenses.” If you remove it for other purposes, you will pay a penalty.
529 plans have been around since 1996 when they were created by a piece of legislation authorizing qualified tuition programs. These qualified tuition programs are sponsored by a state or state agency, and their primary purpose was to be a tax advantaged investment vehicle to save for future qualified higher education expenses.
How do the new tax laws affect 529 savings plans?
The Tax Cuts and Jobs Act signed into law in December of 2017 expanded the definition of education expenses that can be considered as “qualified” to include K-12 tuition. As private school parents, we now have a new option to consider when planning for payment of our private school tuition.
Key Features of 529 Plans
Find a summary below of key features of 529 plans that are important for parents of K-12 students in private schools to consider:
- Earnings in a 529 plan grow federal tax free and in most cases state tax free. The benefit here is that if you have been saving money each year for private school tuition through an investment/savings account in which gains were taxed, now those earnings can be tax free in a 529 plan.
- Many states offer a state income tax deduction or tax credit for contributions to a 529 plan. For example, the Georgia state income tax deduction for contributions to a 529 plan is $4,000 for joint filers per year or $2,000 for single filers or head of household tax filers. South Carolina permits a state income tax deduction of 100% of any contributions to the SC College Investment Program (“Future Scholar”).
- Contributions in Georgia and South Carolina can be made up to the 2018 federal filing deadline to claim a state income tax deduction on the 2017 individual state income tax return (it’s not too late!).
- Effective, January 1, 2018, families now have the option to withdraw up to $10,000 per child from a 529 plan to cover K-12 tuition at private elementary or secondary schools. Withdrawals are tax-free at both the federal and state level when used to pay for K-12 tuition.
- The account owner is responsible for ensuring and documenting that the distributions are used for qualified expenses.
- There are no annual contribution limits to 529 plans, however there are maximum aggregate limits which vary by plan but are typically generous. This means that you can annually contribute to a 529 plan each year for K-12 education as well as continue to contribute for future higher education expenses.
- A grandparent can contribute to the 529 plan up to $15,000 ($30,000 for joint filers) per child without gift tax consequences in 2018. There is also the option of “super funding” a 529 plan for grandparents which means that five years of contributions can be made at once ($75,000 for single filers or $150,000 for joint filers) without gift tax consequences if the grandparents elect to treat the contributions as having been made over a five-year period.
Plan Information for South Carolina and Georgia
- The plan offered by South Carolina is the Future Scholar. Learn more at futurescholar.com
- The plan offered by Georgia is the Path2College 529 plan. Learn more at path2college529.com