New Tax Law Expands Use of 529 Plans for Elementary and Secondary Schools

A 529 college savings plan has historically been a useful tool for saving money towards a child’s college tuition and higher educational expenses.  Although contributions into a 529 account are made with after-tax dollars, some states may allow you to deduct contributions to a plan from your state income tax (unfortunately, California does not).  And so long as distributions from the account are used for college tuition and expenses, any gains realized in a 529 account are not subject to federal income tax and, in most cases (including California), state income tax.  In short, a 529 plan offers parents, grandparents, and other family members a very tax-friendly opportunity to save for ever-increasing college expenses for their loved ones.

With the recently-passed “Tax Cuts and Jobs Act” of 2017, Congress has expanded 529 savings plans to now cover elementary and secondary school  tuition, school-related expenses such as tutoring, online educational materials, and books, and educational therapies for students with disabilities.  Each beneficiary under a 529 plan would be allowed to receive up to $10,000 per year in tax-free distributions to cover such expenses. 

Before now, the only vehicle that offered tax-free savings for elementary and secondary school costs was a Coverdell Education Savings Account.  These accounts come with limitations that do not apply to 529 plans.  For instance, in order to qualify for a Coverdell plan, the plan contributor must earn less than $110,000 per year ($220,000 if married, filing jointly) and the annual contribution limits are $2,000 per year, per beneficiary. 529 plans are not encumbered with these restraints. 

There is no requirement that a separate 529 plan must be used for elementary or secondary school costs.  Thus, if you already have a 529 plan, you may want to discuss with your plan administrator whether it makes sense to start taking distributions for pre-college expenses, especially if your child suffers from a learning disability or requires extra-curricular learning assistance.  If you have not set up a 529 plan for your beneficiary, the recent changes to the law now provide even greater incentive and flexibility to do so.

Daniel Nevis is a partner at the law firm of Miller Morton Caillat & Nevis, LLP, located in San Jose, California.  If you have questions for Daniel about this article, please email him at djn@millermorton.com