- Families now have the option to use up to $10,000 in annual tax-free 529 plan withdrawals to cover elementary and high school costs.
- They still get the tax advantage but forfeit some of the benefits of compounding ahead of college.
At Sewickley Academy, a private school in Pittsburgh, families have yet to ask about the changes to 529 plans.
While the Tax Cuts and Jobs Act is still very new, "my initial reaction is, I'm anxious to see how it plays out," said Brendan Schneider, Sewickley's director of advancement.
"With the new tax bill, families may want to reexamine their strategies to pay for college," said Joe DePaulo, the CEO and co-founder of College Ave Student Loans.
Families now have the option to use up to $10,000 in annual tax-free 529 plan withdrawals to cover those early educational expenses. "That's a significant change to how 529 proceeds can be used and may affect both short- and long-term education budgeting decisions," DePaulo said.
Still, it's an option that mostly affects affluent families, Sewickley's Schneider added. "If you start funding monthly from when your child is born, would you want to pull $10,000 out to pay for school when the child is six?"
Of course, there are many benefits to paying for elementary through secondary school with a 529.
Not only can you get a tax deduction or credit for contributions (33 states and the District of Columbia offer a direct state tax deduction for your contributions), earnings grow on a tax-advantaged basis, and when you withdraw the money, it is tax-free if the funds are used for qualified education expenses.
Overall, the average cost of tuition at private schools across all grades is nearly $24,000 a year, up 4 percent from a year ago, according to the National Association of Independent Schools. Only about one quarter of all students receive financial aid.
But making early withdrawals could also forfeit the benefit from long-term compounding, and college is still significantly more expensive than grade school. (While 529 balances have been growing, so are college costs, see the chart below from the College Savings Plans Network.)
All in, families with students in four-year private colleges spent almost $47,000 in 2017–18; that's up 3.5 percent from the year earlier, according to the College Board. In college about two-thirds of all full-time students receive aid.
Mary Morris, chair emeritus of the College Savings Foundation and CEO of Virginia529, one of the country's largest 529 programs, said she noted immediate interest in the new rules among plan contributors, some of whom have already made distributions to pay for K–12 tuition.
In Virginia, there is no holding period, so participants can deposit money into an account, claim their state's tax deduction and then take up to $10,000 out to pay their tuition bills.
"For now, there is no holding requirement," Morris said. "If we see a lot of money moving through quickly, that might change in the future."
However, Morris is optimistic about the new law and the renewed interest in savings plans. "I'm hoping people will use this as yet another tool, leaving more in for the long term than the short term," she said.
"Ultimately, I trust our families to figure out what works for them."
More from Your Money, Your Future:
Big mistake: Choosing a college savings plan based solely on state tax breaks
Here's a new tax bill provision that will help you save on school expenses
10 states where you can stretch your 529 on private-school costs