529 Plan: the New Rules…and Why you Need to Know Them!

What is a 529 Plan?

The 529 Plan has been around for awhile, since 1996. Along with ESAs (Education Savings Accounts), they are the go-to place to stash cash for your kids’ college.  The IRS defines 529s as, “A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training, or for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school for a designated beneficiary, such as a child or grandchild.”

It’s money you put into good mutual funds (hopefully) that grows (hopefully) tax-free when withdrawals are made and used for authorized educational expenses – like books, tuition, etc.  Personally, I use vanguard (#NotSponsoredJustAwesome).

What’s New?

As of 2018, you can use some of these funds for private tuition for elementary and secondary schools.  Previously, the money was only allowed to be used for college matriculation and related expenses.  Now, you can use up to $10,000 per year to pay for private school for your child.

This also means you can purchase related “computer technology or equipment.”  The distribution will qualify is used by the beneficiary (your child) during the time he or she is enrolled in an eligible institution.

Where do I get a 529 Plan and how do I fund it?

They are readily available from all major financial institutions.  There are two kinds though.  The one discussed before is the type where you throw money into it and hope it grows.

The second is a prepaid tuition.  If you go this route you will be committing to state schools that are part of the program, but you lock in the tuition of today instead of whatever it may be 18 years from now.  These are only available from qualified educational institutions.

Funding it is the easy (or hard) part.  Anyone can contribute to the plan.  Most institutions have a form that makes it very easy for others to gift funds to the account.  The only thing to watch is if you are blessed with a generous gift giver that they stay under the yearly threshold of $14,000 or there will be other tax issues.

Who Owns It, Who Can Use It?

The person who sets up the account owns it.  The designated beneficiary (the child) is the one who benefits from it.  Whoever sets the account up has complete control of the account.  There can be only one.  Meaning if you are a parent only one parent will be named on the account and technically have control of the account.  If a grandparent sets it up they control it and its use is up to their discretion.

The person benefiting, the child has no control over the account.  If for some reason the child does not need the funds they can be rolled over to a sibling without tax penalty.  Any other non-beneficiary non-education uses will be subject to tax penalties.

Should You Use Your 529 Plan for K-12 Education?

Hmm, good question.  Many are already thinking, what’s the catch?

Nothing. You have the money for school. You need the money for school. You withdraw the money for school.

Detractors of the new law say it was designed to help people get around state taxes.  Maybe it was, maybe it wasn’t.  It was a last minute inclusion to the bill its attached to by U.S. Senator Ted Cruz, a Republican from Texas, and we do not have state taxes here in Texas so it does not really “help” us in that way.  So for us, it’s just gravy. And you know how much we like gravy down here!

But, should you use it?

Obviously, this is a personal family decision.  But, a 529 plan will work like any other long-term savings account (like a 401k or IRA) which means if you are using it for long-term planning you won’t see much benefit by using it in the short term.  Only about 10% of American school children are in private schools. So, unless you have quite a bit stashed in a 529 plan already or there is really something wrong with the public school where your child is enrolled there is probably no real reason to touch the funds until college.

For the average family (no talking to the high earners here) you are really deciding between funding your child’s K-12 education or college education.  If you start using the money now there will be less, if any left for college.  Spending and saving at the same time does not work. That is where the real family discussion should begin.

As always before you begin throwing money around discuss it as a family and then verify your understanding with your financial institution and financial planner.  There is nothing worse than financial “surprises” at tax time.

Do you have a 529 Plan for your kids?  How do the new rules affect how you plan to use it?