Changes in the 529 Plans

My daughter Kourtney recently graduated from preschool in June. It's been a pleasure to see the growth in her the last twelve months as she prepares to start Kindergarten. As she gets older, the thought of having to pay for college in the distant future gets closer, and one method of saving that I am using is a 529 plan.

A 529 plan is a tax advantaged savings plan designed for saving for future education costs. When funds are contributed into a 529 plan, there is no deduction at the time of the contribution (for plans here in California), however that money grows tax free (assuming the funds are withdrawn to be used for qualified educational costs). Prior to the passing of the Tax Cuts and Jobs Act, these funds had to be used on post-secondary (college) and associated costs (tuition, books, supplies and equipment) to qualify.

With the passing of the Tax Cuts and Jobs Act, 529 plan contributions are more appealing. Funds can now be withdrawn to be used on up to $10,000 in tuition incurred with enrollment at an eligible elementary, middle school, or secondary school. This is an important change in tax code because many clients of mine were hesitant to put money away for their young children that couldn't be used until college. Funds can now be used for private elementary and high school costs, if the guardian so chooses.

Note: As of the publishing of this post, the California Franchise Tax Board has determined that current California State tax law does not conform to the new federal treatment of 529 plans. This means that for California taxpayers, the earnings portion of any distribution from the 529 plan to pay for tuition at a qualified elementary, middle school, or high school, will be subject to the 2.5% California tax.