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Tax Reform Bonus: 529 Plans Now Hold Even Greater Appeal

For residents in high tax states (such as New York) the recent tax overhaul has led to a higher tax bite. You can reduce the impact by making greater of use of ‘529’ education savings programs.

529 funds deploy after tax-dollar funds in specialized accounts that can grow tax-free and help pay a considerable portion of your children’s education expenses such as tuition, books, and often room and board. Interest in such plans has surged, and such plans now have $275 billion in assets, up 140% from a decade ago.

With a $10,000 limit now in place for deductions for state income or sales and property taxes, a write-off for a 529 contribution can help lower state income taxes that may no longer be deductible on a federal return.

A key change in the tax code also now makes 529 funds eligible for up to $10,000 a year per student for private-school tuition for K-12. In the past, such funds were only to be earmarked for higher education.

Paying for K-12 education with 529 funds brings trade-offs. Some private schools are now asking about families’ 529 savings plans and are taking that information into account when making financial-aid decisions. And withdrawing these funds at an earlier stage reduces the power of compounding when it comes time for college.

Another key recent change: Savers can now transfer up to $15,000 per year from a 529 plan to 529 ABLE accounts. These benefit those who become blind or disabled before age 26 without limiting their access to Medicaid and Supplemental Security Income benefits. (Annual contributions to 529 ABLE plans are currently capped at $15,000, and withdrawals can be tax-free if used to pay expenses such as housing, legal fees, and employment training).

Of course, a range of other tax-favored education funds are available such as the Coverdell Education Savings Account, as well as tax-credit offset programs such as the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC).

Lastly, a goal of fully funding an education savings account may not be realistic for many. It may be wise to consider the 1/3 rule. One-third saved for education in advance, one-third coming out of annual cash flow while children are in school, and one-third funded by student loans. Talk to your financial planner to determine which approach s best for you.