How do the new tax laws affect my 529 plan?

Matt Mercer

K. Matthew Mercer, CPA2

Quality education is something worth saving for, so why not use a plan that offers incredible income tax breaks? 529 plans can be used for college savings and prepaid tuition plans and are a great option for either saving for yourself or your child. However, it’s important to understand how new tax laws affect the rules for 529 plans.

What are the new tax laws for 529 plans?

First, it’s important to remember that all states have their own rules!  Congress has passed a new 529 law allowing distributions for K-12. You can only withdrawal up to $10,000 per beneficiary for K-12 each year. The new law only adjusted rules on the Federal level. Each state still makes its own decision if it wants to couple with Federal or decouple from Federal.  Missouri is one of the states that has coupled with Federal and allows for distributions from a 529 plan for K-12.

States that do not allow K-12 Distributions

However, this does vary from state to state. Illinois, for example, does not allow for distributions from a 529 plan for K-12.  If you take a distribution from an IL 529 Plan to pay for K-12, Illinois will require you to pay taxes on the earnings (on a pro-rata basis) and take back the deduction you received from that initial contribution.  Some states such as California also impose a 2.5% state penalty tax on the earnings portion of non-qualified withdrawals, which includes distributions used to pay for K-12 tuition.

States that allow K-12 deductions and withdrawals are as follows:

·         Arkansas ·         North Dakota
·         Connecticut ·         Ohio
·         Georgia ·         Oklahoma
·         Idaho ·         Pennsylvania
·         Indiana ·         Rhode Island
·         Iowa ·         South Carolina
·         Kansas ·         Utah
·         Maryland ·         Virginia
·         Massachusetts ·         West Virginia
·         Mississippi ·         Wisconsin
·         Missouri

Not every state has made a final ruling on whether they’ll conform with Federal rules, so the list of states that allow the withdrawal for K-12 education expenses will likely change over time. Regardless, you may be subject to state income tax on the earnings portion. Since these rules do vary from state to state, it’s important to verify what state tax liabilities you may be subject to when withdrawing funds from your 529 plan.

Your 529 Plan

If you’re considering getting a 529 plan or are just interested in how the new tax laws may affect you, please contact us at Krilogy and we’ll be happy to discuss it with you. Just remember that state-level laws rather than federal laws are the ones that could potentially have a negative tax affect by withdrawing for K-12 qualified education expenses.

Important Disclosures
Investment Advisory Services offered through Krilogy Financial®, an SEC Registered Investment Advisor. Krilogy Financial, its employees and financial advisors cannot provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your attorney or qualified tax advisor regarding your situation. Krilogy Tax Services, LLC is a separate but affiliated company to Krilogy Financial and provides separate tax services for a fee.