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Joined: Feb 2010
Posts: 2,640
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529 Accounts: Not Just for College Savings Anymore?By Karen Wallace | 12-05-17 | 05:00 AM Morningstar The House and Senate are working to reconcile a proposed tax reform bill, which includes a section that would expand 529 allowable educational expenses to include K-12 tuition. Currently only qualified higher education expenses are eligible for penalty-free, tax-favored withdrawals; now, if the bill passes as is, up to $10,000 per year, per beneficiary could be used for tuition expenses "in connection with the enrollment or attendance of the beneficiary as an elementary or secondary school student at a public, private, or religious school." How Would It Work? If this proposal becomes law, you could fund a 529 account with aftertax dollars when the child is an infant (or even before birth in the currently proposed version of the bill), and any earnings the investments enjoy wouldn't be taxed when you use the money to pay for private school, which translates into a big tax cut on private school tuition. If this bill were to become law and you decided you would like to use your 529 for these dual purposes--longer-term college savings as well as more intermediate-/short-term elementary school tuition--there are a few things to keep in mind. First, from a practical standpoint, it would make sense to aggressively fund the account as early as possible so the investment earnings have more time to compound. Contributions of up to $14,000 qualify for the annual gift-tax exclusion (per person, so $28,000 per married couple) or up to $70,000 ($140,000 per married couple) with five-year election (read the IRS rules here). Some states offer a tax break on contributions as well. The next consideration is how one would marry the goals of investing for elementary school and college in the same account. Currently, 529s are used for one goal: saving for college, which has a long time frame that makes a higher allocation to equities appropriate.
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Joined: May 2014
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Can grandparents open one (college) and parents open another(private school)?
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Joined: May 2013
Posts: 153
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Unless something is changing from current law, and I've heard nothing that says it is, a 529 isn't opened for any particular school/age. Each parent and each grandparent can create and contribute to an account for each child. Any of those funds can be used for any qualifying educational expense, the definition of which may be expanded to include K-12. So parents and grandparents can each open one, and K-12 private or college expenses can be paid from either or both. Or one parent can open one for a child and everyone can make contributions The account owner is the person who opens the 529. As the account owner, this person manages the college saving plan: selecting or changing the beneficiary, selecting the investment options, making withdrawals, terminating the account, and receiving withdrawals if no other person is designated. The account owner also makes contributions to the account, but others can help, too. Anyone can contribute to an already established 529, but only the account owner controls and sees the assets within it.
The account owner, typically a parent, opens the account for the designated beneficiary, typically their child. However, grandparents, other relatives, and friends are all potential 529 plan account owners. The account owner does not have to be related to the beneficiary. The owner designates the beneficiary, sets investment allocations, and, ultimately, controls withdrawals from the account. Depends how much the grandparents trust the parents, I suppose.
Last edited by Cranberry; 12/06/17 04:04 PM.
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Joined: Feb 2010
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The enacted legislation contains the 529 provision mentioned in the original post. Yes, You Really Can Pay for Private School With 529 Plans NowBy RON LIEBER New York Times DEC. 21, 2017 With 529 plans, you put money in, let it grow for years in mutual funds and then pull it out to use for higher education expenses. When you do, you don’t pay capital gains taxes on what you’ve earned over time.
Other 529 tax breaks exist, too. It is states, not the federal government, that actually administer the plans, and 35 of them offer some sort of tax deduction or credit when you deposit money. If you want to know how things work in your state, Savingforcollege.com is an excellent resource.
In what we should now refer to as the old days, you might save money for 18 years and then pull the money out over four years while a child completes college. But now, wealthy families can do what’s known as “superfunding” 529 accounts with a pile of money upfront. Then, they can pull out the $10,000 maximum each year to use for elementary and secondary school, until a child starts college. (The money will not be available for home schooling expenses, however, as that fell out of the final bill this week for technical reasons.)
Last month, Vanguard ran a scenario for me that is worth examining again to see the possibilities. At this point, it would be financial malpractice for accountants and financial advisers not to be recommending to clients that they consider this kind of upfront investment.
Imagine a wealthy family in the highest tax bracket that opens a 529 plan with $200,000 and doesn’t add another cent. The money grows at 6 percent annually, and the family takes out the maximum $10,000 each year, avoiding $2,380 in taxes annually. During the elementary and secondary school years, it saves $30,940 in taxes.
At that point, the account would still have money left over. A lot of money: $370,717. And once the beneficiary of the 529 account enters college, the family can withdraw as much as the entire annual cost of college and related expenses (not just $10,000) each year, avoiding even more capital gains taxes over that period.
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Joined: Oct 2011
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Good news if you're a private school owner. Bad news if you're pretty much anyone else in the country.
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Good news if you're a private school owner. Bad news if you're pretty much anyone else in the country. People who save in 529 plans and send their children to private schools can benefit, as the excerpt explains.
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Joined: Oct 2011
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Only in the narrowest, short term sense will those people benefit. In the big picture, real life happens. When private school becomes more affordable, the private school tuition goes up. Parents become merely a passthrough for providing tax dollars to private school owners. My guess is they capture all of the tax benefits plus some, because:
1) Not all parents will save in a 529.
2) This is one of those areas where fear causes the market to behave irrationally (DON'T YOU CARE ABOUT YOUR CHILDREN'S FUTURE?!?!).
The past predicts the future, and university is a perfect model for what will transpire, with the exception being scale, because parents don't have nearly as much time to save for private school. How have affordability interventions worked out there?
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