By Carolanne M. Chavanne, CFP
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currently have 529 plans in place to pay for college.1 Under the new law, up to $10,000 of 529 plan assets can now be withdrawn for K-12 tuition costs for each of the named beneficiaries of the plan.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 a number of issues surrounding this change. In states that have not been able or do not want to comply, there are factors that 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?
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.
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