You may be wondering how the new tax reform law will affect you and your family. There are several changes that will affect you, but I will limit my discussion to only one of the changes. One way your family will benefit from the law is around 529 plans.
You are probably wondering what a 529 plan is and how can it help my family. 529 and how does it work? I will answer those questions and share how the new law might help your children’s education if you are looking for ways to offer a better venue for learning.
529 plans provide flexible, tax-advantage accounts designed specifically for education savings. The money inside the plans can be used for qualified education expenses for schools nationwide. The benefits of these plans can be broken down into three areas: tax advantages, flexibility on using your money and investment choices. I will address the first two in this article.
I believe one of the best part of having a 529 the tax savings. You start a 529 plan by putting after-tax dollars (your take-home pay that hits your bank account) into it, but the beauty comes when the earnings grows tax-free (means you don’t pay taxes on the interest earned). This is unlike your brokerage account, a bank money market account, or a CD that you receive a 1099 at the end of the year so you can pay taxes on the interest / gains you earn. When you use the money for qualified educational expenses, historically used primarily for college tuition, books, etc., you don’t pay taxes on the withdraws. Isn’t tax free money a beautiful thing?
Another benefit comes from the flexibility in using the 529. As I mentioned earlier, historically it was primarily for higher education to accredited schools nationwide. As you withdraw the money to pay for college expenses, you can use tax free dollars from your earnings inside your 529 plan. Now with the new tax reform laws, you can use the same tax fee dollars and pay for tuition expenses for grades K-12. Gosh things just got better! If your kids have grandparents that setup their college 529 or if you had previously set one up, you can now use that money to provide a better education on their primary education, tax free! Or even if you haven’t started one just yet, you can fund it now.
Please bear in mind that you can only use up to $10,000 per year per kid for expenses related to K-12. An important reminder is that maximum contribution limits vary among state. However, to avoid gift tax consequences, federal law allows single taxpayers to contribute (gift) up to $14,000 in one year or a lump sum of $70,000 to cover five years. For a couple wanting to contribute, you can double that.
As you can see, between the tax savings and the flexibility of a 529 plan, it could be your perfect option to help save to provide private education. According to TexasPrivateReview.com (2017-2018), the average private school tuition in Texas is $6,900 for elementary and $10,000 for high school age students.
What if you have not started saving, however you have a small budget, that is good news! You can begin with a little as $50 a month or a one-time deposit of $250 depending on the investment provider.
I hope is was able to answer some of your questions on what a 529 plan is and what it could do for your child’s education and your bank account. It truly is a viable option for many families.
If you should have any questions, want more information, questions about you how your existing plan or interested in starting a 529 plan, you can find me at LibertyCrownFinancial.com.
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss.
Federal tax laws are complex and subject to change. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of tax or legal nature, you should consult with your tax or legal counsel for advice. Although this information has been gathered from sources believed to be reliable, it cannot be guaranteed, and the accuracy of the information should be independently verified.
Note: Investors should consider the investment objectives, risk, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.