How the new tax law improves 529 education savings plans

Columbia Threadneedle Investments

May 2018

Key Points

  • Continually rising education costs make education planning a necessity
  • 529 savings plans offer families a flexible investment strategy to help pay for these expenses
  • New tax legislation has expanded the use of 529 savings plans to include tuition costs for K-12 education

One of the most daunting expenses facing many parents is paying for the cost of college or other forms of higher education. Over the past 30 years, the increase in the cost of college tuition and related expenses has significantly outplaced the broader inflation rate.1 529 savings plans are recognized by many investors as one of the most effective ways to invest money to meet future education expenses.

Over the past 30 years, the increase in the cost of college tuition and related expenses has significantly outplaced the broader inflation rate.1

Why consider a 529 savings plan?

One factor that makes 529 savings plans attractive is the tax benefits they offer. From the outset, contributions grow tax-deferred. When money is withdrawn from the account to pay for qualified education expenses, no federal or state taxes are due on earnings that accumulated in the plan.2

529 saving plans also offer flexibility in terms of the amount of money that can be invested (up to $150,000 for married couples using advanced gifting strategies that allow a one-time gift) with no gift tax implications. Extended family members, such as grandparents, are also able to contribute to the plan on behalf of specific beneficiaries.

Keep control

A common myth associated with 529 savings plans is that when you invest the money on behalf of a child or grandchild, you lose control of the money once the child is old enough to use it. But as a 529 account owner, you are always in control of the assets in the account, unless it’s an UGMA or UTMA 529 plan account (a custodial 529 plan account). This is an important benefit that helps ensure that your investment will be used as you intended.

Factor in flexibility

If the intended beneficiary decides not to pursue higher education or earns a scholarship that makes your contribution unnecessary, you can designate the money for a different purpose.

Your options include:

  • Changing the beneficiary to another family member of the original beneficiary, without penalty
  • Using it for your own educational expenses if you decide to take college courses
  • Leaving the assets in the existing account for future use
  • Withdrawing the assets

Keep in mind if assets are withdrawn for a non-qualified educational purpose, earnings on these withdrawals will be subject to applicable federal and state taxes.

Extend your options with new tax laws

The new tax law enacted in December 2017 extends the scope of 529 savings plans to include K-12 private, religious and public tuition expenses. You can now withdraw up to $10,000 per year tax-free from your 529 savings plan for each beneficiary to help cover tuition costs at a private, religious or public elementary school or secondary institution.

Due to changes implemented in the new tax law, the tax benefits of 529 savings plans now extend to K-12 private and public tuition expenses.

Plan for your education investment goals

529 savings plans have long been considered a reputable investment vehicle to help pay for educational costs. They are flexible, allow the account owner to maintain control, and offer unique giving and tax advantages. If your goals include building up investments to help cover future education costs for your children or grandchildren, discuss the benefits and risks of 529 savings plans with your financial advisor.

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