Upper middle-class and wealthy clients may have scored a victory from the new tax laws other than lower tax rates that they don’t even know about yet.
If they are using a 529 college savings plan, they now will be able to use those assets for K-12 expenses, in addition to college costs, says Deborah Fox, founder and senior advisor of Fox College Funding, a consulting firm that helps families reduce out-of-pocket expenses for college.
School tuition is the only expense that can be covered for K-12, so the new benefit will be gleaned by higher-income parents who send their children to private schools, she says.
529 college savings plans, named for a section of the tax code, allow savers to put aside money to grow tax-free and be withdrawn tax-free if spent on college expenses. And they have been surging in popularity for years.
Indeed, as of the end of 2017, there was a total of $319 billion saved in these accounts, triple the $105 billion a decade earlier. And now, because of the tax law changes, these accounts come with several new benefits.
In addition to now being eligible to pay for elementary and high school, the new tax laws also allow savers to roll over their existing Coverdell savings accounts into their 529s. Coverdell accounts, found in Section 530 of the tax code, are also tax-advantaged ways to save for K through 12 expenses.
Why roll one into the other? Because 30 states allow deductions for 529 contributions.
In fact, those deductions can be even more attractive now, because the new tax laws also limit other federal deductions, such as state or local property taxes.
But the state tax issue can get complex as each state is different in what it allows, Fox says.
It can range from $500 to the full amount of the contribution.
And while savers are free to use any state’s plan — they aren’t restricted to their own state’s – they don’t necessarily get to avail themselves of the other state’s tax treatment. They still may want to use another state, however, because the features and potential funds available in the plans can differ widely from state to state.
Advisors would be well-served to at least know the broad outlines of these new changes, because college planning can be very specialized and a differentiator in their service to clients, Fox says.
“There are many nuances that advisors need to know to help their clients make appropriate decisions for a number of reasons. First, the college plan needs to fit in nicely with the client's overall financial plan. Second, there are multiple ways any college planning goal can be achieved,” Fox says.
“Having a toolbox of various strategy options and learning how to lead clients to make the right decisions for their particular situation enables advisors who are well-versed in both early and late-stage college planning can stand out from others,” she says.
This story is part of a 30-30 series on tax-advantaged investing.
