The New 529 Plan Rules & Tax Changes, Diversified Wealth
By: Andrew Rosen, CFP®, CEP®

With the recent “Tax Cuts and Jobs Act,” 529 plans will now be put under a finer microscope. However, the changes do open up more ways to utilize the plans and allows more room for some intriguing financial planning strategies.

To be fair, this isn’t the first blog I’ve written about 529 plans.  Click here to see how a 529 plan works and their benefits.

What has changed?

The new tax bill includes an interesting new clause.  Contributions to a 529 plan remain the same, but now the funds can be used for pre-college private school education (tuition) with a limit up to $10,000/yr.  Individuals with large assets to transfer have even more flexibility on a plan’s use.

Why is this so important?

What’s the big deal?  It’s not like many people have enough to contribute to a 529 plan for college AND save heavily for grade school, right?  Unfortunately, that’s correct.  On average, 529 balances are:

  • $20,700 for parents with children 0-5,
  • $39,300 for those with children 6-13,
  • $52,300 for those with children 14-18.

The average cost of a private college (in 2017-2018) is $34,740.  It’s $25,620 for an out-of-state public university, as well.  These funds only put a dent into college costs!  Of course every little bit helps, especially when we are talking about your children’s education.  Let’s also not forget the mounting 1.3 trillion dollar student debt epidemic, as well.

What 529 tax planning can be done?

As many are aware, contributions to a 529 plan grow tax free (if it’s spent on a qualified schooling expense).  Many don’t realize; however, over half of the States allow for some form of tax deduction if you are contributing to a 529 plan.  (Here is a complete list from to reference your State as one that allows some form of State tax deduction.)

If you itemize your deductions under the new bill, you are capped at the maximum ($10,000) for State and Property taxes combined.  Therefore, if your itemized deductions are more than the $24,000 standard deduction (for married filing jointly) and you do choose to itemize, you’ll want to lower your State or Property tax bill as low as possible. This will help with itemization and allow you to fall within the $10,000 limit.

Additionally, there are a couple great tax strategies if you also live (and work) in a State which offers a deduction for 529 contributions.

  1. One strategy is for those currently paying for some form of k-12 private schooling out of cash flow and can’t afford to save much more. Instead of paying the institution directly, contribute at least $10,000 of your grade school tuition to a 529 plan.  Then simply take it out the next day and pay the tuition.  You’ll receive a deduction for those contributions, which you were paying out of cash flow anyway.  Benefit from the new tax laws by funneling the $10,000 through the 529 plan.  Take advantage of these savings while still paying your tuition as planned.
  2. The other strategy is about contributing as much as you can to these plans. It will be a deduction on your State tax return, thus lowering your taxes owed in that State.  Again, this means more of your combined State and property taxes will fall under the $10,000 limit for itemized deductions.

Allow me to illustrate the above with an example.

In Pennsylvania, each spouse who earned income can give the current gift tax amount to a 529 plan (currently $15,000/individual).  Let’s say you make $200,000 and file that for State income tax purposes.  You would typically owe $200,000 (gross wages) x 3.07% (PA State Income tax rate) which equals $6,140 in PA taxes.  Now, if you instead contribute the maximum ($30,000) as a couple to any 529 plan, you’re formula will change.  It’s now $200,000 – $30,000 (your 529 contribution) which equals $170,000. You then take $170,000 x 3.07%.  That now equals$5,219 in taxes owed.  You’ve now saved $921 ($6,140 – $5,219= $921).  

Keep in mind, every state handles their tax liabilities differently.  In some, the deduction isn’t available at all.  Further, some states don’t even have a State income tax (which is an entirely different story).

What to do now?

There are different strategies based on everyone’s unique circumstances.  The tax laws are complicated, for sure. I suggest working with someone to help you understand if these strategies are advantageous; someone to help with the appropriate balance for you and your family.  At the end of the day paying less to this guy is never a bad thing!

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Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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