Congress enacted the 529 savings tax exemptions back in 1996. The plans are named after section 529 of the IRS Code.
Our November 2017 blog talked about the tax advantages of a college 529 savings plan. Originally designed as an incentive to save for college expenses, the plan provides both federal and state tax incentives.
Essentially, both the 529 College Savings and 529 Prepaid plans can earn tax-free interest. When it comes time to withdraw the money for expenses, those withdrawals are likewise tax exempt.
In 2018, 529 plans can cover grades K-12
The 2018 Tax Cuts & Jobs Act includes new provisions covering 529 plans. Plan owners can now withdraw up to $10,000 each year for each child and apply the money for K-12 school expenses. Qualifying schools include religious, private, and all public K-12 schools.
Qualified withdrawals can be for room and board, tuition, books, and associated school fees. They can also cover the cost of computers and Internet access while the student is enrolled in the school. The hardware and software must be used for educational purposes.
Not every state is in step with the new 529 K-12 breaks
As for college 529 plans, interest earnings are exempt from federal income tax. However, since 529 plans are state-sponsored, not every state has adopted the K-12 tax break.
Brian Boswell, a 529 expert, writing in this Forbes Magazine online piece, advises caution, because “even states which reflect federal definitions may be reviewing their language in light of the Tax Cuts & Jobs Act.”
For example, Colorado has the same federal language and 529 definitions, but not the same tax benefit. Alabama, on the other hand, specifically excludes 529 distributions for K-12 student expenses.
So, check your state rules. Only 20 states so far have caught up to the new K-12 provisions.