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Are the New Changes to 529 Education Savings Account as Beneficial as You Think?


Are the New Changes to 529 Education Savings Account as Beneficial as You Think?

On Dec. 22, 2017, Congress passed the Tax Cuts and Jobs Act, which expanded the benefits of the Qualified Tuition Program, a tax-exempt education savings account commonly known as the 529 plan. Prior to the amended bill, the 529 plan was only eligible for higher education expenses, but are now applicable to elementary and secondary education expenses at public, private and religious institutions. Homeschooling expenses were omitted from the bill for technical reasons.


Despite this added benefit, the 529 plan is still not as strategic as it seems on the surface. Saving money in a 529 plan to pay for K-12 education or college (or both) brings about one major downfall: withdrawing funds for non-qualified expenses such as a car, a laptop, health insurance or other expenses, are subject to Federal income taxes and an early withdrawal penalty. With this in mind, saving for your children’s future expenses involves more than just utilizing a 529 account.

Prior to the amended tax bill, parents could make tax-free withdrawals for qualified college expenses, such as tuition, books and on-campus housing. However, the list of qualified expenses remains the same for K-12. The new bill didn’t add new expenses to the list; thus, parents’ savings for K-12 are limited on expenses outside of tuition and books.

The Bottom Line:

The amended 529 plan could potentially offer more flexibility in tax-free education savings. However, be sure to thoroughly research how both Federal and State-level tax implications would play out before making withdrawals. If the funds are applied toward "non-qualified expenses,” you’ll be responsible for paying income taxes plus a withdrawal penalty. Whichever tax-exempt education savings plan you choose, do your homework beforehand.

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