The rising costs of a college education can be a source of anxiety for many parents with growing children.
That’s understandable, since the average cost of college tuition, fees, and room and board at a private, four-year institution averages nearly $51,000 per year, and is growing every year.
The sticker shock associated with financing a college education has moved many families to look more closely at 529 college savings accounts, tax-advantaged investment vehicles that allow savers to set aside funds that grow tax free to defray future education costs. In many states, state income tax deductions add to the incentive to contribute.
If you’ve been thinking about a 529 account, the tax reform law passed in Washington late last year brought a few changes that may offer some additional incentives to get started. Changes in the new law will allow 529 savers a greater degree of flexibility and could make these tax-advantaged college savings vehicles even more attractive.
Congress created 529 savings accounts, named for section 529 of the tax code, in 1996. Since then, 529 accounts ballooned in popularity, with more than $275 billion in assets invested nationwide as of the end of 2016, according to data compiled by the College Savings Plan Network.
Each state administers their own 529 plans, which have been open to anyone seeking to save for future post-secondary education expenses (or other designated beneficiaries).
Savers in 529 plans can typically choose among a range of investments, such as stock or bond mutual funds, with the hope that their savings will grow until they’re needed to pay education expenses. Investments in a 529 account grow tax-free, and account holders are not taxed on withdrawals for qualified education expenses. In addition, many states also allow savers to reduce their tax liability by deducting contributions to a 529 on their state income tax returns. (Consult with your financial professional, accountant or tax preparer for details about the relevant laws in your state).
In the 2017 tax reform package, Congress authorized changes to the 529 plans that may make them worth a second look for families who are anxious about paying for children’s education. Among those changes: Many families will now be able to use funds saved in 529 plans to pay not only for a post-secondary education, but also for private K-12 schooling.
The new law also allowed for the first time the ability to transfer 529 account assets to 529 ABLE plans, which will allow families with blind or disabled dependents to save without affecting eligibility for Medicaid or Social Security Supplementary Income.
The Wall Street Journal explains how such provisions may make 529 savings worth a second look, with some caveats:
Many taxpayers will find 529 contributions even more attractive following the tax overhaul, said David Taylor, a certified public accountant with Anton Collins Mitchell LLP in Denver. The overhaul limits deductions for state income or sales and property taxes to $10,000 per return. So a [Estate tax] write-off for a 529 contribution can help lower state income taxes that may no longer be deductible on a federal return.
Another landmark change of the overhaul allows 529 plan assets to be used for up to $10,000 a year, per student, for private-school tuition for K-12.
This change is a mixed blessing. It provides savers who have 529 plans with more flexibility, but private schools will want to know about families’ 529 savings and may take that information into account when making financial-aid decisions.
Note that while these potential changes have been authorized in federal law, it will take time for these new features to be made available nationwide, since 529 programs are administered at the state level. To find out more about how your state 529 plan may change, consult with a financial professional or contact your state treasurer’s office.
There’s no question that education can be the critical factor in driving lifetime earnings. A study by the Georgetown University Center on Education and the Workforce found that workers with bachelor’s degrees earn 84% more than those with just a high school diploma, and 31% more than holders of associates degrees.
New reforms to 529 savings plans may help to defray some of the expenses associated with college and other education needs, helping young workers limit to some degree heavy student loan burdens, which could be a boon for millions of Americans looking toward the future.
These are just some of the changes and factors to consider when opening a 529 savings plan, have an existing 529 account and are looking for ways to get more out of it. However, note that SIFMA does not offer investment or tax advice, so take time to discuss your concerns and questions with a financial or tax professional who can offer guidance tailored to your needs.