529 plans are saving accounts for children’s education that offer tax benefits. The growth of investments in the 529 plan is withdrawn tax-free for approved education/college expenses. The plan can be used for any accredited college or university. Under the new tax law, there have been multiple changes to 529 college savings plans.

A potential new downside is that an individual/household can no longer deduct 529 contributions on their federal tax returns. Contributions are still deductible on state tax returns in the majority of states. Savers are not limited to only contributing in a 529 account in their home state. It is possible to open accounts in multiple states that offer deductions for 529 contributions.

The biggest change in 529 plans from the Tax Cuts and Jobs Act is the ability for parents to use money from the account for K-12 private education. Before this change, parents could only withdraw money for college education expenses, but under the new plan, you can withdraw up to $10,000 per year for private elementary and secondary education. Withdrawals for college expenses are not capped.

Another change that will affect 529 plans, is the new limit on gifts without triggering the gift tax. This is set at $15,000 for 2018. Meaning any family member can donate $15,000 to all children with a 529 plan without paying a gift tax. Contributors can avoid the gift tax by front-loading a 529 plan by making up to five years’ worth of contributions at once, $75,000 to each child. The contributor won’t be able to make any new contributions for 5 years, but the account has more years to benefit from compound returns on the savings and grow the investment faster.

There are still tax penalties involved with making non-education withdrawals from 529 plans. Withdrawals for any other purpose are subject to federal income tax, and a 10% early withdrawal penalty.

– Wyatt Swartz

– Contributions by Eli Perlmutter

– 2/22/2018