On December 22, President Trump signed into law the Tax Cuts and Jobs Act. While the bulk of the attention has been focused on the major changes to personal and corporate tax rates, the plan also includes some provisions that make 529 savings plans more beneficial.

When it comes to college savings, 529 plans are the most popular strategy for a number of reasons. There are no income restrictions, plan owners have several different investment options, assets can grow tax-free and come out tax-free as long as they are used for qualified higher-education expenses, there is no requirement to spend the assets within a certain time period, and the owner has the option to change the beneficiary.

A possible drawback to the 529 plan is that the assets must be used for qualified higher-education expenses, otherwise they would be subject to taxes and penalties. Families who wanted to utilize a tax-advantaged plan to save for a private or religious education at the primary and secondary level have often turned to the Coverdell Education Savings Account (ESA). The Coverdell ESA has the same tax-advantaged growth benefits as a 529 plan, but it can be used to pay for K-12 or college expenses. However, there are some key differences between the Coverdell ESA and 529 plans.

With the change in the tax code, funds in a 529 plan can now be used for qualified primary, secondary or higher-education expenses. Families can now take a federal tax-free withdraw from a 529 plan, up to $10,000, for qualified K-12 tuition.

It is important to point out that the new tax code covers federal tax implications only. As Kathryn Flynn pointed out in her recent article, “Don’t count on a 529 state tax break for K-12 tuition” some states may not be too quick to adopt the changes. In these states, withdraws used to pay for K-12 expenses may not qualify for favorable state tax treatment. Before taking any distributions from a 529 plan for K-12 expenses you should consult with a tax adviser.

Kevin Warman, CIMA®, RMA®

(Last Updated 1/11/2018)