Should you Tap a 529 Plan before College?

| March 01, 2019
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529 savings plans are tax-advantaged education savings vehicles and one of the most popular ways to save for college today. Much like the way 401(k) plans changed the world of retirement savings a few decades ago, 529 savings plans have changed the world of education savings. Contributions to a 529 account accumulate and earnings are tax free if the money is used to pay the beneficiary's qualified education expenses.

These tax-advantaged 529 college savings plans aren’t just for college anymore. These funds can now be used for kindergarten through 12th-grade tuition at private schools—up to $10,000 per child per year—as a result of the 2017 Tax Cuts and Jobs Act.

Not only do 529 plans provide federal tax-free growth and tax-free withdrawals for qualified expenses, but many states offer residents a full or partial tax credit or deduction for contributions to their state’s plan, and some states allow you to deduct contributions to any plan.

That said, not all states permit 529 plan spending on K–12 tuition expenses, so be sure to check your plan’s rules, or you may be subject to state income tax plus penalties.

Of course, tapping a 529 earlier than college may not make sense, even if permitted by state law. If you open a 529 account when a child is born, for example, and then use it a few years later to pay for kindergarten, the investment gains—and therefore the tax benefits—will likely be modest.

It’s always good to have more options. But the main advantage of 529s is their long-term potential for tax-free gains—to say nothing of saving for college itself—and both can be compromised if you begin drawing down the funds much earlier.

 

 

 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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