New 529 Plan Changes

Do you own a 529 account? If so, you’ve probably heard the Tax Cuts and Jobs Act bill has brought about a number of changes for individuals and families. Some of the revisions impact 529 savings plans. Here are the answers to questions you might have concerning the new 529 Plan changes.

Q: What were the original 529 plan rules?

A: The federal government created 529 savings plans to encourage families to save for future college costs. These plans offer tax-free growth on invested funds and tax-free withdrawals for qualified higher education expenses. Once the federal government established 529 plans, 33 state governments created their own tax benefits for their state’s 529 plans. For example, Indiana offers a state tax credit to Indiana taxpayers who contribute to the Indiana plan. The credit is 20 percent of the annual contribution amount, up to a maximum credit of $1,000 for a $5,000 contribution.

Q: What are the 529 new guidelines?

A: The money you invest will still enjoy tax-free growth and tax-free withdrawals for qualified college education expenses. The bill also extends these benefits to withdrawals of up to $10,000 per year for payment of private and religious K-12 tuition costs.

Q: When do the changes go into effect?

A: Great question! Because the Tax Cuts and Jobs Act was signed into law at year-end 2017, states have had little time to incorporate the new federal guidelines and other changes into their individual plans. Currently they are still working on them. If you intend to use your 529 account for payment of K-12 private or religious school tuition this year, it may be in your best interests to wait until you get a “green light” from your state’s 529 plan administrator.

Q: Will the changes benefit me?

A: Possibly. The original purpose of 529 plans was to allow a tax-advantaged, longer-term way for families to save for future college education costs. Funds in 529 accounts are typically invested according to the child’s age–more aggressively in the child’s early years, then gradually becoming more conservative as the child nears college age. The new changes, which include distributions for shorter-term education costs, can complicate the investment strategy of the 529 plan. Be sure to consult with us if you plan to use a 529 plan for both K-12 tuition and college education expenses!