529’s have been around for years. Just as a reminder, these are the tax-advantaged savings accounts designed for college expenses. The basic concept is contributions to 529s go in after taxes, however, they grow tax free and there is no tax upon distribution if the money is used for qualified education expenses.
Now, every state has its own version of the 529 plan. Some of the differences between states include which investment management company manages the money (Vanguard, BlackRock, etc), the total amount you can put in the 529 account, overall expenses of the plan, as well as whether there is a tax break for any contributions. Actually, that final point is more dependent on whether your state has an income tax.
There was a pretty significant change made to 529 plans with the tax law that went into effect last year.Because of it you really cannot consider 529 plans just for college anymore. Yes, 529s are now eligible to be used for primary and secondary educations.Or, as I know it, grade and high school.
You may now use up to $10,000 from a 529 account to pay for tuition at a private elementary or secondary school.Both $10,000 and tuition are purposely bolded because these are two big differences if you want to use 529 funds for grade and high school expenses. There is a $10,000 dollar limit on how much you can cover with your 529 for these school levels. Additionally, the money can only be used for tuition. Don’t plan on using the 529 funds to pay for summer camps, field trips, room and board (for boarding schools), etc. The only permitted expense is tuition and at $10,000 a year.
I do like this change as it tackles a big concern I hear often from clients – what if my kid doesn’t go to college or need the money? Please understand your money is never lost if your child doesn’t use a 529 as there are lots of options to get that money out of a 529 account.However, this change certainly increases the odds of being able to use the funds in a 529, assuming your child attends a private grade or high school.
As always, talk with you local tax specialist as not every state permits 529 balances to be used for these grade school expenses. Let's do our best not to have any tax surprises.
One piece of advice from me – It almost never makes sense to pay an advisor 1% to manage your 529. It may have made sense years ago, however, every state 529 plan I have seen recently is so simple anyone can do it, especially as they all have age-weighted investment choices now.