The following column from Phoebe Venable, President and COO of CapWealth, was posted by The Tennessean on Jan. 12, 2018.
Just before the end of the year, President Trump signed the Republican tax reform bill. The Tax Cuts and Jobs Act has occupied the headlines for the past few weeks because of the major changes being made to personal and corporate tax rates and deductions. The plan also includes a smaller change that will expand the benefits of 529 savings plan to include private school expenses.
A 529 plan is an educational savings plan operated by a state, state agency or educational institution, named after the IRS code section that created them. There were two types of 529 plans created: a savings plan and a pre-paid plan. Tennessee’s pre-paid plan is called TNStars College Savings 529 Program. Visit www.tnstars.comfor more information. The 529 Savings Plan works a lot like other types of savings plans in that contributions are invested into mutual funds or other investment vehicles. The plan you choose will provide you with investment options, and the value of the account will go up and down based upon the performance of the investments you select.
Before the new tax plan, 529 plans were exclusively used for college related expenses, but the new tax plan includes a provision that allows 529 plans to be used for K-12 education expenses. This includes private school tuition as well as public and religious elementary and secondary school expenses. It does not allow 529 plans to be used for homeschooling expenses. Beginning this year, 529 plans can pay up to $10,000 a year for K-12 expenses.
These accounts are easy to set up and contributions can be automatically deducted from your bank account every month. You can contribute up to $14,000 a year for single filers and $28,000 for couples filing jointly. There is also an option that allows you to fund a 529 Savings Plan with up to $70,000 (single) or $140,000 (married) in one year, but then no contributions can be made for five years. Although your contributions are not tax deductible on your federal income tax return, the earnings are tax-deferred.
Distributions from the 529 plan to pay for the child’s college costs are tax-free. You, as the donor, control the account, which means you call the shots. You decide when distributions are made from the account and for what purpose. Funds may be used for any qualifying educational expense. This includes supplies, books and room and board. Savings can be used for qualified higher education expenses at any accredited traditional college or university, community college, vocational or trade school in the U.S. And you, the owner of the 529 plan, name the beneficiary which can be your child, your niece, your grandchild or even yourself!
If your child (the beneficiary of the 529 plan) does not use all of the funds, you can reclaim the funds, but the earnings portion will be subject to income tax and an additional 10 percent federal tax penalty will be imposed on the earnings as well. An exception can be claimed if you withdraw the funds due to death, disability or if your child receives a scholarship and doesn’t need the funds for college expenses.
Another great feature of these savings plans is that a family with more than one child can simply change the beneficiary. If your oldest child receives a scholarship and does not need the 529 funds, you can change the beneficiary to another child and avoid the penalty or at least defer it until all of your children have completed college. What a nice problem this would be — to have over-saved for college!
Phoebe Venable, chartered financial analyst, is president and COO of CapWealth. Her column on women, families and building wealth appears every other week in The Tennessean.