529 College Savings Plans provide you the opportunity to invest and save for college education and meanwhile get the benefit of tax free growth and withdrawals, so long as the withdrawals are used to pay for qualified education expenses. Tax free always has a special ring to it, doesn’t it?
Originally the 529 plans were specifically to be used on college education expenses. But in 2018, they updated the withdrawal limitations to include the opportunity for families to withdraw up to $10,000 per beneficiary, per year for K-12 tuition at private and parochial schools.
Yet another reason to consider investing in the 529 plans for your children’s education costs.
Each of these benefits provide a reason for you to consider contributing to the 529 plan if you see private school and/or college education in your children’s futures. But let’s look at the numbers below to make sense of it.
If you contributed $10,000 today into a 529 College Savings Plan for your newborn baby with the plans to send him/her to private high school, then you would benefit from years of compounding tax free growth in the account.
Increase that original contribution, contribute for multiple years or even leave it in longer for college…. and the impact will be even greater.
The earlier you invest in this tax free vehicle, the more potential there will be for months or years of college or private school tuition to be paid for by tax free investment earnings!
The benefit you receive will depend on a few different factors: the state in which you live, the state 529 plan you are contributing to and what your state income tax rate is. But needless to say, for many individuals in most states, there may be a benefit to using this strategy.
What would happen if you contributed money into a 529 plan and then subsequently withdrew the funds in the same year?
This strategy would be an attractive option for anyone currently paying for private school, undergrad or graduate programs out of pocket.
If you were a NY resident filing jointly and contributed $10,000 to a NY 529 plan and then subsequently took it out in the same year to pay for private school or college, the benefit to you would be this:
Let’s say you live in Virginia and contribute $10,000 to the Virginia 529 College Savings Plan and then subsequently take out $10,000 in that same year to pay for private school:
Contributions to an Illinois 529 plan of up to $10,000 per year by an individual, and up to $20,000 per year by a married couple filing jointly, are deductible in computing Illinois taxable income.
Some states provide more benefits than others, but regardless, it is a tuition payment savings!
For some, these amounts are negligible. For others, it is less money out of your pocket and you will take the financial wins where you can get them!
In Colorado, New Mexico, South Carolina, and West Virginia, in state 529 plan contributions are fully deductible to offset state taxable income. That could be a VERY significant tax savings depending on how much you contribute in that year and there is an argument to be had around front loading funds into these accounts sooner than later.
Before doing this, be sure your state 529 does not have contribution timeline restrictions on how long your funds need to be in the account in order to receive the state tax deduction. I only know of Montana and Wisconsin imposing a time limit on how long the funds need to be in the account for, but some others may as well.
The matter of the fact is that if you are seriously considering private school or college for your children – the 529 College Savings plan is hands down the most tax effective way to do so. There are limitations to the 529 Plan, but in my opinion there are far more long term benefits and opportunities than there are limitations.
The Saving For College website is an incredible resource when trying to get specifics on each states 529 plan and their nuanced benefits.
Blog Post: What You Need to Know about 529 College Savings Plans
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