Exploring 529 plans and K-12 tuition
Friday, March 30, 2018
The latest tax overhaul now allows parents to pay for K-12 private school tuition using the money saved in a 529 plan. They can withdraw $10,000 per student per year, starting from the 2018 tax year.
The money, however, can only be spent on tuition and not on textbooks, computers or other fees or activities. There are no such restrictions for college funds. The law applies only to students to go to private schools, which is about 10 percent of students in the country.
In theory, it sounds great for parents who want their kids to go to a private school but lack the funds. In practice, however, parents need to be cautious. This is a federal change, and the individual states have yet to announce their agreement to the change. The federal government created the 529, but it is administered by the 50 states and the District of Columbia. They have not changed their rules to reflect the latest change.
The 529 plan was created for parents to save money for future college expenses, and some experts are advising investors not to take their money out yet for K-12 expenses. In most cases, premature withdrawals will be subject to income tax and a 10 percent penalty, and even payback of the state tax deductions received at the time of the deposit. Parents must be careful of these repercussions.
Also, the amount of money one can save per year varies from one state to the other. While states like Michigan have a cap of $88,000, states like Virginia allow $500,000.
More than anything, parents should take stock of their financial situations before withdrawing any amount. Can they spend the amount and still save enough for college?
A Fidelity survey showed that only 29 percent of American parents save enough for their kids' college. Now, even this small percentage could be spending their money and deplete college resources further. These are long-term investments and are best recovered when they have been allowed to mature to a healthy amount.
Private school tuition costs vary among states, so the expenses can be high in some regions. For example, the average annual tuition for a private K-12 school in the Washington area is $23,388 per year, much higher than the $10,000 one can withdraw from a 529.
Nevertheless, there are a lot of parents who want to go through the private school route for their kids. This could be a good start for them. The first step should be to check out the state's website and go through the rules to minimize losses.
States that have announced they will fall in line with the federal change include Alaska, Georgia, Utah, Delaware, Kentucky, Mississippi, Maryland, Wisconsin, Missouri, South Carolina, Nevada, Tennessee, Virginia and West Virginia. States like Iowa, Maine, and Nebraska have yet to introduce 529 changes and have asked residents to wait if they don't want to lose out on favorable tax treatment.
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