The New 529 Tax Rule: How Does It Affect You as a Parent?

Raising a child is no easy task. It involves plenty of emotional and financial input. In fact, one of the biggest financial hurdles that parents face when raising their children is providing them with a good and decent education. This is true especially if you plan to send your children to private school.

The recent Tax Cuts and Jobs Act of 2017 have significantly reshaped the approach that millions of Americans have towards planning and strategizing their children’s education. In fact, the Act has now permitted the use of 529 plans when it comes to private school tuition for K-12 grades.

The definition of a 529 plan

A 529 plan is one that is operated or run by an educational institution, or even by the state. It has numerous tax advantages and makes it simpler for parents to save up for their kids’ education. Initially, it was only applicable to college tuition; but now, parents can gain access to an effective 529 plan starting from the elementary level, to middle school, all the way to high school.

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Of note is that even though the contributions are non-deductible, the earnings are not to be put up for federal taxes or those of state taxes as well. Therefore, this means that funds that are part of a 529 plan can be withdrawn free from penalties or taxes to an amount up to $10,000 as annual expenses!

A few things to be wary of

Before you consider withdrawing from your kid’s 529 plan, you’ve got to be aware of a couple of caveats that come with the new plan. In fact, it’s best you first have a look at the whole system from a strategic standpoint. You’ve got to really comprehend who benefits immensely from the new change. And secondly, you’ve got to understand how state interpretation affects how you should integrate the 529 plan into your overall financial strategy.

Big Earners will benefit the most

Statistically, a majority of American school children are attendees of public schools. In reality, their parents are only able to cover a small part of their college tuition.

In fact, in the latest release of the Fidelity Investments’ 10^th Annual College Savings Indicator Study, a majority of parents are aspiring to cover at least 70% of their children’s college tuition. Sadly, what the Study uncovered is that only a mere 29% of families are able to cover their children’s college costs.

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So, with plenty of American families having a hard time meeting their children’s college costs, the individuals geared to benefit from the new 529 plan are high-income earners. These are individuals that have the ability to easily cover their children’s education for both their primary and secondary years. In fact, for a majority of middle to low-income families, utilizing 529 funds during K-12 education years could potentially lead to lesser amounts of money saved up for college years!

Hence, before you begin making withdrawals, you’ve got to know what you’ll be prioritizing more on; the K-12 tuition or college tuition.

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Understand the 529 plan effectively

Another aspect you’ve got to be aware of is ‘piggybacking.’ Piggybacking is when your state obeys the framework of a given federal tax. However, states also have the freedom not to obey the federal system. Hence, you could find yourself facing state taxes and penalties if you decide to withdraw funds from your 529 plan.

So before you make the decision to utilize 529 funds for either high school, elementary, or middle school, you need to do a bit of research to confirm whether your state conforms to the new 529 federal tax.

Due to the complexities and intricacies of tax laws, understanding how a tax law works can be particularly stressful. Hence, if you’d like to improve your comprehension of tax laws, it’s advisable you get in touch with your lawyer or your tax attorney first before making the decision to utilize the new 529 plan.