Should you use them for K-12 education? – Councilor Forbes
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In 2019, changes to federal law allowed 529 plans, tax-advantaged education investment accounts, to be used up to $ 10,000 each for student loan repayment and K-12 education, in addition to tuition.
Cash strapped parents may feel pressured to save for K-12 college and private expenses. Here’s what you need to know to know if saving for both is the right choice for you.
What is a 529 plan?
A 529 plan is an education investment account generally authorized by one of the 50 states.
529 plans come in two forms. A form offers investment options, similar to a 401 (k), that you can spend on K-12 tuition or the college of the student’s choice. The other is prepaid tuition plans where you can prepay tuition fees for years to come at today’s prices.
The first type is one that would typically be used for K-12 tuition or to save for college without knowing which school the child will go to.
How to Use a 529 Plan for K-12 Education
There is no difference in what is needed to contribute to 529 plans for K-12 or college costs. The same tax benefits apply to both. At the federal level, your account grows tax-free. At the state level, your state may give you an income tax deduction or a credit on contributions.
You would likely incur a penalty tax and federal income tax for any amount withdrawn for K-12 textbooks or other expenses beyond tuition. You could also end up with state taxes as a clawback for state tax deductions on contributions.
Advantages and disadvantages
Benefits of Using 529 Plans for Kindergarten to Grade 12 Tuition
- The money in your 529 plan grows tax-free. No matter what state you live in, you won’t pay tax on the growth of income from your investments and savings if you use the money for qualifying educational expenses.
- Your education savings account is versatile and virtually unlimited. You can save more in a 529 plan account on an annual basis than an account Coverdell Savings Account, for example, which can also be used for eligible education expenses at all levels of education.
- You have a variety of Kindergarten to Grade 12 gift options. 529 plans have gift options, websites, and other resources to ask friends and family to help with your student’s education. It may be easier to request direct donations for 529 plans than for other types of investment accounts.
- This can be a great short-term savings strategy if your child still goes to private school. Depending on your state, you may qualify for a deduction or a tax credit for contributions to a 529 plan. You can deposit the money and withdraw it later in the year if necessary. If your income tax rate is 5% and you contribute $ 4,000 that you withdraw in the same year, you could save $ 200 on your taxes.
Cons of Using 529 Plans for Kindergarten to Grade 12 Tuition
- There are fewer eligible expenses for K-12 education. According to IRS, you can pay tuition and fees up to $ 10,000 in the “public, private or religious elementary or secondary school (K-12) of the beneficiary’s choice.” Beneficiaries are designated by the owner of 529 plan accounts as the person whose education will be paid from that account. The distribution limit takes into account all of the student’s accounts. For example, if a grandparent, aunt or uncle and parent each open 529 plans for the student, they need to coordinate so that someone does not end up with the 10% penalty plus earnings tax. on withdrawals. Textbooks and necessary supplies are eligible educational expenses for graduate school withdrawals.
- This could make saving for college more difficult. When elementary school, middle school, and high school are in the same pot as higher education, it can prevent families from saving enough for college. Take the time to figure out how much you really want to pay for your child’s K-12 education and college. Don’t rely on scholarships because of athleticism or a specific school’s education.
- The attribution of gifts becomes more complicated. Since funds from 529 plans can be used for more than just saving for college, parents and friends who have contributed for years may not understand what their money can be used for. If you are using the money for K-12 tuition, let the donor know that this is how the money will be allocated.
- State income tax deductions or credits generally have contribution limits. The maximum you can contribute to a 529 plan while receiving state tax benefits varies. For example, New York allows a tax deduction of $ 5,000 per contributing taxpayer per beneficiary. Jointly filed income tax returns allow a deduction of $ 10,000. If you are able to save more than $ 10,000 per year, you will not get a state tax deduction on these additional contributions.
- Not all states allow withdrawals from 529 plans without penalty for K-12 education. While 529 plans can technically be used for K-12 tuition, not all states allow the use of 529 plans for K-12 education, says Patricia Roberts, director of operations for Gift of College, a gift registry website for college savings accounts. Check your state’s rules to see if penalty-free withdrawals can be made for K-12 tuition.
Alternatives to saving in a 529 plan
If you want to save for your K-12 student’s tuition separately from their college savings, consider a Coverdell Education Savings Account, a savings account or one individual retirement account (IRA).
Coverdell Education Savings Account
Coverdell Education Savings Accounts were one of the primary tax-sheltered avenues for K-12 education before 529 plans could be used for education in private schools. Accounts can be opened for students under the age of 18. Up to $ 2,000 per year can be contributed per beneficiary or per student designated to use the funds, regardless of the number of accounts opened for them. All distributions must be made before the beneficiary turns 30.
Individual retirement accounts
IRAs are investment accounts that can only be used, without penalty, for higher education. They are not an option to save for K-12 education. However, they can help you separate college savings from K-12 savings, especially when you’ve already reached the contribution limits for state tax deductions.
Traditional savings account
Once you’ve reached your maximum annual limit for the Coverdell Education Savings Account and 529 plans, you may decide to keep the money that will be used fairly quickly for K-12 education in a safe place. A traditional savings account may be your best option.
Compare the costs of private schools or choose a public school
Much like college, costs for private schools are both negotiable and comparable. Make sure to apply for scholarships and look for competing offers at other schools. Also carefully study the long-term advantages of a private school over free local public schools.
Saving for Kindergarten to Grade 12 education in a 529 plan can be a good strategy for families who fail to meet maximum state tax deductions and credits based on the money they put in. side to pay for their studies. Even if they save for the K-12 tuition for the following year, they could end up saving hundreds on their state taxes.
However, families who are struggling to save for education costs should not consider the opportunity to save for Kindergarten to Grade 12 in a 529 plan as a reason to send their children to a private school. The result could be that the student borrows more for college because the money in the account is used before college starts.
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