New Rules for 529 Plans

Education Savings PlanEasing the burden of paying for education

The Tax Cuts and Jobs Act of 2017 will expand the use of 529 Plans to allow savers to accumulate money and pay for education on a tax-free basis. Before we discuss the changes let’s review the basics. A 529 Savings Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs.  You are not required to use the 529 in your domicile state and your plan, regardless of which state is the sponsor, can be used for any college in any state.  Contributions to a 529 Plan are invested and grow tax deferred.  If the funds are ultimately used for education, distributions come out federally tax-free. Contributions to the plan qualify for the $15,000 annual gift tax exclusion.  The Plan has to have a named donor and a designated beneficiary. The donor of a Plan retains control indefinitely and only the donor can request withdrawals and can close the account at any time.  However, if the funds are used for anything other than education, the earnings portion of the account is subject to income tax plus a 10% penalty.  Most plans allow for lifetime contributions of $300,000 or more.

Under the old federal tax rules, 529 plans could only be used for eligible colleges and universities. The Tax Cuts and Jobs Act of 2017 now allows 529 plans to cover up to $10,000 of qualified expenses for elementary or secondary public, private or religious schools.

Advantages 

  1. If used for education the earnings are tax free.
  2. Can be used for elementary or secondary public, private, or religious school.
  3. Contributions qualify for the annual gift tax exclusion.
  4. Donor maintains control indefinitely and can revoke.
  5. Numerous automatic age-based investment options and more than 50 Plans to choose from.
  6. Transferrable to family members.

Disadvantages

  1. Penalty of 10% on earnings if not used for education.
  2. Restrictions on use, see 1 above.

There are numerous plans to choose from including one’s offered by your home state, but your home sate 529 may not be the best one for you in terms of fees and performance.  Fees and expenses for both advisor-sold 529 plans and direct-sold 529 plans have fallen over the past five years but direct-sold plans still have lower fees and no commissions. We only recommend direct-sold 529 Plans to our clients and we help them with the investment options and managing the Plans as a complimentary service.

Tom Reynolds, CPA & Matt Reynolds CPA, CFP®

Francis C. Thomas CPA, PFS

Robert T. Martin, CFA, CFP®

Gordon Shearer Jr., CFP®

Jeff Hilliard, CFP®, CRPC

(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)