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.
