Previously, 529 accounts were only allowed a tax-free distribution if used to pay for qualified higher education expenses at post-secondary schools (colleges and grad schools). The new law states that families can distribute up to $10,000 per student, per year, on qualifying K-12 school expenses tax-free. This will provide benefits for families with children in private schools all over the country. According to the National Center for Educational Statistics, the average cost of private school tuition for the 2011-2012 school year was $10,740 with middle and high school costing more than elementary school.
Prior to the tax law change, only Coverdell Education Savings Accounts (ESA) could be used to pay for qualifying K-12 expenses tax-free but contributions were limited to just $2,000 per year per beneficiary. Parents with existing Coverdell accounts can roll them over into a 529 account with no tax consequence now that 529s can be used for the same expenses.
For those that live in a state that provides a state income tax deduction for contributions made to its 529 plan, this could be an opportune time to make new contributions. While New Jersey doesn’t offer a tax benefit, New York and Pennsylvania do provide state income tax deductions for contributions to 529 plan accounts. Parents with 529s already set up for their children with the goal of funding college may want to think about setting up a new 529 for K-12 expenses. The investment policy of the 529 to be used for elementary and high school tuition should be different than accounts earmarked for college. The investment time horizon is shorter for K-12 and the aged-based portfolios often offered by 529 plans are calibrated for the years in which your child will be attending college. Investment options offered by 529s range from the very conservative (interest-bearing choices, short-term bonds) to aggressive (100% stocks) giving the account owner the flexibility to customize the allocation decision. Assets inside a 529 are not subject to ordinary or capital gains taxes and essentially grow tax-free when ultimately used to pay for qualified education expenses.
Finally, the annual gift exclusion amount for 2018 has been raised to $15,000 per year per person. One unique feature, only offered by 529 plans, is the ability to use up to five years worth of the annual exclusion amount all at once. For example, a parent could contribute $75,000 in one year ($15,000 x 5 years) to a 529 plan for the benefit of her child ($150,000 if married and each parent contributes equally) and remain under the annual exclusion amount. This is an attractive technique for those willing to gift larger sums now rather than stretching them out over time. Assets in a 529 plan are not considered part of your estate.
Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Withum Wealth Management. [“WWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from WWM. Please remember to contact WWM in writing, if there are any changes in your personal/ financial situation or investment objectives for the purpose of reviewing/evaluating/ revising our previous recommendations and/or services. WWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the WWM current written disclosure statement discussing our advisory services and fees is available for review upon request.