New 529 Rules Offer K-12 Savings Boost

In years past, qualified tuition programs — aka “529 plans” — operated as tax-free piggy banks to be used for higher education expenses only. The new Tax Cuts and Jobs Act, however, brings those benefits to the K-12 world.

As we’ve discussed previously, the Tax Cuts and Jobs Act includes numerous provisions that affect the daily lives of millions of Americans. A perfect example of this is the new rules for 529 plans, changes that could impact thousands of families in the Chattanooga area.

What are 529 plans?

529 plans fall under the category of “qualified tuition programs,” or QTPs. In simple terms, nondeductible cash deposits can be made into 529 plans, and the earnings of those monies can grow tax-free and be used to cover educational costs.

Old 529 college-only rules

In the past, monies from 529s could be dispersed, tax-free, to pay for the "qualified higher education expenses" of a plan’s beneficiary (key phrase: higher education). So long as the disbursements were equal to or less than the higher education-related expenses — tuition, fees, books, etc. — of the beneficiary, those payouts could be made tax-free.

New 529 K-12 friendly rules

Before the Tax Cuts and Jobs Act passed, 529 cash disbursements could only be directed to cover "qualified higher education expenses.” Now, though, such payouts — up to $10,000 total per year — can cover costs associated with public and private elementary or secondary schools, as well as religious schools.

Why this matters to you

A recent Wall Street Journal article noted that in the decade between 2006 and 2016, assets held in 529 plans more than doubled from $106 billion to $275 billion. That, naturally, coincided with the ballooning price tag of higher education. But as educational expenses rise across the board, those looking for cost-effective ways to pay for K-12 schooling now have a new weapon in their arsenal thanks to new 529 rules.

If you’d like to learn more about how to make a 529 plan work for you, we’d love to talk you through your options.

Kevin Rose, CPA and CFP,  is a founding partner at Market Street Partners, PLLC, an accounting firm headquartered in Chattanooga, Tennessee. He can be reached at [email protected].