529 Savings Plans: Use For K-12
529 Savings Plans were created in 1996 to encourage saving for higher education. They've been considered wildly successful, amassing more than $319 billion in assets as of year-end 2017, according to the College Savings Plan Network. Now, Congress has added K-12 to the plan. What will that mean for your family?
All 50 states offer at least one 529 plan. Indiana offers three: CollegeChoice 529 Direct, CollegeChoice Advisor and CollegeChoice CD. Why have 529 plans been considered so successful? Since 1996 they have provided people with a tax-free vehicle for saving money for post-secondary education. Money accumulated in a 529 plan is free from federal and state income taxes as long as it's withdrawn to pay for qualified higher education expenses.
New Benefit, but Limited
While traditionally only available for post-secondary education expenses, 529s may now be used for high school and more starting in 2018. Congress has expanded the scope of 529 plans to include grades K-12 in addition to post-secondary. This means that 529 funds can now be used to pay for tuition costs at an Indiana elementary or secondary public, private, or religious school.
There are two limitations when 529 distributions are used for K-12:
- Distributions for K-12 are limited to $10,000 or less per calendar year.
- Distributions for K-12 can only be used for tuition costs and not other related expenses.
Indiana 529 Tax Benefits
Many states, and Indiana is one of them, also provide additional tax benefits for taxpayers who contribute to 529 plans. Indiana residents receive a 20 percent tax credit for a contribution to an Indiana 529 plan with a maximum credit of $1,000 per year.
This credit changes for 2018, if you are using your plan to pay for K-12 tuition. For the 2018 tax year, you can only claim 10 percent of your contribution, with a maximum credit of $500. Starting in 2019, the maximum credit for K-12 plan contributions will increase to 20 percent of the contribution amount, with a maximum credit of $1,000.
For contributions for post-secondary education expenses, the Indiana tax benefit remains unchanged for 2018.
Definition of 'Qualified Expenses'
When you take money out of a 529 plan you need to know whether it is a qualified expense or an unqualified expense. If the distribution is for a qualified expense then it will receive the favorable tax treatment mentioned above.
Qualified expenses for private or public high school and elementary school are for tuition costs only. This is a more narrow definition of qualified expenses than used for higher education, which also includes books, room and board, and additional miscellaneous items.
Are Two Accounts Better Than One?
The original intent of the 529 savings plan was to allow families and individuals to get a head start on saving for the cost of college. Starting early gives you the opportunity to contribute money, invest it, and hopefully have a nice pool of funds available when your child is ready for college. The long timeframe gives savers the opportunity to benefit from compounded investment growth coupled with the plan’s tax-free status when used to pay for appropriate expenses.
If you plan to use a 529 plan for K-12 tuition costs, you may want to consider establishing two 529 savings plans for each child. Why? The timing for distributions to pay for K-12 expenses will be much earlier and can reduce the benefit of longer term investing. This money should likely be invested differently than money being saved for college since the time horizons are different.
The 529 plan has been expanded to include K-12 tuition costs. While this is a potentially nice tax benefit to families that save, it’s important to remember why you are saving. Don’t fall into the trap of using money earmarked for college to help pay for today’s expenses. Keeping two accounts may help hold you accountable or at least make it easier to track!