Everyone knows that college costs are expensive, but do you know that elementary and secondary tuition amounts can be costly, too? A way to prepare for rising education costs is to set up and contribute to a 529 plan. Prior to January 1, 2018, a contributor would establish an account for the benefit of a designated beneficiary to provide for that beneficiary’s higher education expenses. Qualified higher education expenses include:
· equipment (including technology) required for the enrollment or attendance at an eligible educational institution,
· expenses for special needs services in the case of a special needs beneficiary that are incurred in connection with such enrollment or attendance, and
· room and board for students who are enrolled at least half-time.
The Tax Cuts and Jobs Act of 2017 modified the rules of 529 plans. After December 31, 2017, 529 plans now allow for up to $10,000 in annual distributions for tuition in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. So now, not only can you pay for college from the 529 accounts, you can also pay for elementary school and high school from these accounts. This is a beneficial modification for those who pay significant elementary and high school tuition.
There are tax benefits available for using these accounts. First, the investment growth is federal tax-free as long as the money is used for educational purposes. Second, 34 states offer residents a tax deduction or credit for 529 plan contributions. Most states require that you invest in your home state’s plan to qualify for the deduction or credit, but 6 states including Kansas offer tax benefits for residents who invest in any state’s 529 plan.
Be smart! Start as soon as possible. You can set up a plan as soon as your baby is born and has been assigned a Social Security number. Think about gifting. It is a perfect opportunity for grandparents who want to gift money to their grandchildren. Don’t let education costs go bonkers before you start saving!