The new tax bill has created a new way for millions of American families to pay their child’s tuition from kindergarten through 12th grade at private schools, including religious schools.
Kiplinger’s recent article, “2018 Could Be Grandparents' Year to Pump $150,000 into 529 Plans” explains that, starting this year, the new law lets parents take up to $10,000 per child from that child’s 529 college savings plan to pay their K-12 tuition.
This might be nice to have, since the average cost of private high school is well over $14,000, according to Private School Review. In some states, it’s more than $30,000.
The 529 plans were created in 1996 and are education savings plans operated by a state government or educational institutions to help families set aside funds for future college costs. Money earned in these plans is free from federal and state taxes. It isn’t taxed when withdrawn to pay for qualified education expenses. A total of 30 states also now offer a full or partial tax deduction or credit for 529 plan contributions.
With the new funding option, parents or grandparents can deposit much more into 529 accounts. While the IRS doesn’t limit the amount you can contribute, the overall balance in the account can’t be more than the expected cost of your child’s educational expenses. That amount varies by state, from $235,000 to $520,000, according to SavingForCollege.com.
Starting this year, each parent and grandparent can contribute up to $15,000 annually per child and exclude these contributions from gift taxes. Grandparents can also consider making a large, one-time contribution and opt to spread it over five years to avoid possible future gift or estate taxes.
Most 529 plans have a variety of investment choices. To guard against potential losses, the funds to be used for K-12 expenses should be invested more conservatively, compared with funds for a child’s college education. Since a parent has 18 years to allow money in 529 plans to grow and pay for college expenses, a portfolio heavy in stocks is usually a smart move. However, parents needing money in 529 plans to pay K-12 private school expenses could have as little as one year before the funds are needed. In that case, it’s better to keep this money in short-term bonds, which are less risky. It’s also possible to have more than one investment selection in a student’s 529 plan. This is important to remember, if you’re planning to use the account for both types of education expenses.
A couple withdrawing $10,000 annually from their 529 plan to cover K-12 tuition expenses will start to drain the money needed for college costs. Taking large amounts out of the account each year will also restrict their ability to benefit from tax-free growth in the 529 plan.
The new federal tax law gives parents and grandparents more options to pay for the young child’s education. Ask an estate planning attorney how you should go about accomplishing this.
Reference: Kiplinger (January 25, 2018) “2018 Could Be Grandparents' Year to Pump $150,000 into 529 Plans”