Tax Reform 529 Plans

New Tax-reform enhances the versatility of 529 education plans

Addressing college tuition expenses and ballooning education debt continues to be a challengTax Reform 529 Plane for both students and parents.  In fact, according to the Federal Reserve, Americans now owe $1.48 trillion in student loan debt. (In case you were wondering, that is $620 billion more than total U.S. credit card debt.) For parents and grandparents interested in reducing the debt load on their children and grandchildren, the 529 plan can be an effective tool.  In fact, the new Tax Cuts and Jobs Act greatly enhances the versatility of 529 plans for taxpayers.

Pre-tax reform

A 529 is a tax advantaged plan that was originally designed to assist families in paying for college expenses.  Unlike custodial accounts, which are taxable based upon income and capital gains, funds used for qualified education expenses grow federally tax-free within a 529 plan. In other words, more of your savings will be used for tuition and less may end up with the IRS.

Additionally, 529 plans are considered an asset of the parent for financial aid purposes, which may be better than other investment alternatives held in the name of the child. These attractive features do not come without a cost. Keep in mind that if the funds are not used for a qualified tuition expense, a 10 percent penalty and tax on any investment gains will be assessed to the account — so be careful not to overfund the plan.

Tax reform enhancements

So, what has changed? Qualified tuition expenses previously included tuition, room and board and computer equipment for eligible post-secondary institutions. Rather than limit benefits to these areas, the Tax Cuts and Jobs Act expands the definition of qualified education expenses to include private elementary and high school tuition expenses.  In fact, the bill allows for $10,000 per year to be withdrawn from a 529 plan for K-12 tuition costs.  (Previously, Coverdell Education Savings Accounts were the only option for potentially tax-free savings for these costs).

While using funds originally intended for college to pay K-12 costs may not be advisable for everyone, some taxpayers could benefit from this approach.  From federal and state tax deductions to investment choices and fees, there are many details that should be reviewed before determining which approach is right for you. One of the first places to start is to determine whether your state offers any income tax deductions. While all 529 plans are federally tax free, not every state offers tax deductions or credits for contributions. If you are fortunate enough to live in a state that offers a deduction or credit for contributions, you may want to use one of your resident state’s plans. For example, New York offers an annual deduction of $10,000 for those filing married/joint who utilizes the New York plan. Pennsylvania offers up to $28,000 in deductions for couples filing jointly that contribute to any state 529 - not just Pennsylvania’s plan. However, New Jersey only offers its residents a small scholarship of up to $1,500 with no state tax deductions for contributions — not a great deal for parents.  However, approximately 30 states do offer a deduction or credit for contributions to a 529 plan, possibly making the state tax deduction benefits for K-12 tuition attractive.

Be careful when selecting the right plan

If no state tax deductions or credits are available, the decision of which plan to use will not be based upon tax deductions.  Rather, the choice of which plan to utilize will be based upon other criteria such as investment choices, fees and other features.

Despite the increased versatility, 529 plans continue to be administered by investment companies with many investment choices available. From age-based options that get more conservative as the child ages to static individual choices, the investment you choose can have a significant impact on your plan over time. Reviewing reports from and on your own or with an adviser can help determine which plan may have the right mix of investments for your individual risk tolerance and time horizon. Remember, the older your child is, the less time you have to recoup investment losses so take extra care when determining the proper investment mix – especially at current market values.

While the investment choices within a plan are critical, investment management fees must also be closely reviewed. Enrollment fees, maintenance fees, sales charges and underlying investment fees can add up. A visit to can help highlight the range of fees that each plan may charge.

Since excessive fees can take a bite out of investment returns in the long term, be sure that you are receiving value and are in the right plan for your needs.

Finally, you may want to review other features such as investment minimums and systematic savings plans. Initial deposits requirements can range between $0 to $3,000 to begin a plan. Often times, 529 plans with no or very low minimums require that you commit to a monthly savings plan of as little as $25 per month. This can be a great option for parents or grandparents without significant funds to get started.

With college costs continuing to rise along with overall student loan debt, providing for a child’s college education is not getting any easier. Developing a game plan to determine how much to save and where to save it can help you better prepare for college funding goals. Consider speaking to your tax and financial adviser to determine the right approach for your unique circumstances.

Kurt J. Rossi, MBA, CFP®, CRPC®, AIF® is a CERTIFIED FINANCIAL PLANNERtm Practitioner & Wealth Advisor. He can be reached for questions at 732-280-7550, & LPL Financial Member FINRA/SIPC.