Big Changes Coming to Your 529 Plan This Year

529 plan
Photo by designer491 / Shutterstock.com

While tax reform merely tweaked some rules for retirement accounts, it significantly changed key rules for another type of tax-advantaged account: 529 plans.

Previously, 529 plans were a way to save money for a child’s higher education. Withdrawals, or distributions, from 529 plans were generally tax-free if they were spent on eligible higher-education expenses, such as college tuition.

Under the recent overhaul of the federal tax code, however, distributions can also be spent on “expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.” In other words, distributions can be spent on K-12 tuition.

This change became effective this year, applying to distributions made in 2018 and thereafter. So, the tax returns due in April 2019 will be the first you file under this new rule.

The good news

This change gives folks a new tax-advantaged way to save money for expenses related to children who attend a primary or secondary school that charges tuition.

A 529 plan is like a Roth IRA or Roth 401(k) account in that money contributed to a 529 plan is taxed only on the front end. So, contributions are not tax-deductible, but earnings grow tax-free, and no tax is due on qualified withdrawals.

As the Internal Revenue Service puts it:

“… the benefit of a 529 plan comes with the tax-free withdrawal of earnings that build up in the plan based on the contributions made.”

Of course, contributions and distributions are still subject to rules. For example, the same section of the overhauled tax code that allows distributions to be used for primary and secondary tuition also limits the total amount of distributions to $10,000 per beneficiary per year.

The bad news

Generally, 529 plans are sponsored by state governments. So, they are subject not just to IRS rules but also to state rules.

This means you cannot assume that the entity that sponsored a 529 plan is abiding by the new federal rules — including the rule that allows 529 distributions to be used on primary or secondary tuition.

Certified financial planner Jeff Jones of Longview Financial Advisors in Huntsville, Alabama, recently wrote for U.S. News & World Report:

“While the federal rules are allowing for kindergarten through 12 qualifying expenses, that doesn’t mean the state or educational institution sponsoring a specific 529 plan has adopted those same federal rules. So far, less than half of the states in the U.S. have confirmed they will conform to the new federal rules.”

Before taking a distribution from a 529 plan, Jones recommends checking with a tax adviser to confirm that the state in which the plan is sponsored is abiding by the new federal rules.

Also, if you have yet to establish an education savings account, don’t assume that a 529 is the best option for you. Money Talks News founder Stacy Johnson details the pros and cons of 529 plans and various alternatives in “Ask Stacy — What’s the Best Way to Save for My Kid’s College?

What’s your take on this news? Share your thoughts below or on Facebook.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
12 Products to Keep Your Car Clean and Organized
12 Products to Keep Your Car Clean and Organized

These items will help put your vehicular mess to rest — and each is available for less than $20 on Amazon.

14 Products That Keep Foods Fresh Longer
14 Products That Keep Foods Fresh Longer

We’ve rounded up innovative Amazon purchases to lengthen the life of your favorite foods and beverages.

7 Things You Should Buy at Estate Sales
7 Things You Should Buy at Estate Sales

Here’s what an experienced estate sale shopper considers a great find.

10 Places Where Social Security Offers the Best Standard of Living
10 Places Where Social Security Offers the Best Standard of Living

These U.S. counties offer retirees a chance to stretch their benefit checks while enjoying their golden years.

10 Ways Anyone Can Earn More Income
10 Ways Anyone Can Earn More Income

Looking for additional cash? Here are a bunch of options that are accessible to anyone with internet access.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Whether you resell it for a big profit or add it to your own wardrobe, this type of clothing is a hidden steal.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

Organize Your Home With These 10 Thrift Store Finds
Organize Your Home With These 10 Thrift Store Finds

Resolve to be clutter-free in 2021 with these secondhand purchases.

11 Laws You Could Be Breaking Without Knowing It
11 Laws You Could Be Breaking Without Knowing It

Seriously? Fibbing about the weather is a crime? This and other little-known legal traps await the unwary.

Is This Treatable Condition Causing Your High Blood Pressure?
Is This Treatable Condition Causing Your High Blood Pressure?

Researchers say too many doctors are overlooking this potential source of hypertension.

13 Things Seniors Can Get for Free — or Almost Free
13 Things Seniors Can Get for Free — or Almost Free

There are many ways to get cheap or free services and goods after reaching a certain age.

These Are the 3 Best Used Cars You Can Buy
These Are the 3 Best Used Cars You Can Buy

These vehicles boast reliability, safety and long-lasting value.

Taking a Multivitamin? Here’s Why You Should Reconsider
Taking a Multivitamin? Here’s Why You Should Reconsider

A new study has bad news for the millions of Americans who spend money on multivitamins.

This Surprise Factor Can Raise Your Risk of Dementia
This Surprise Factor Can Raise Your Risk of Dementia

Nearly half of U.S. residents may face this threat.

21 Items to Cut From Your Budget That You Won’t Even Miss
21 Items to Cut From Your Budget That You Won’t Even Miss

Start off the new year by implementing these small-but-smart savings strategies. They’ll soon add up.

This Is America’s New Favorite Grocery Store
This Is America’s New Favorite Grocery Store

Consumers say a familiar name has become their go-to source of grocery items.

Does Wearing 2 Masks Protect You Better From COVID-19?
Does Wearing 2 Masks Protect You Better From COVID-19?

A growing number of people are wearing two masks instead of just one. Should you join them?

Internet Providers Can’t Charge You for This Anymore
Internet Providers Can’t Charge You for This Anymore

Starting this month, your ISP no longer can bill you for this fee.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

10 Cars You Are Most Likely to Keep for 15 Years
10 Cars You Are Most Likely to Keep for 15 Years

The cars that owners hold onto the longest have one thing in common, a new study shows.

Prepare to Pay More for These 31 Drugs in 2021
Prepare to Pay More for These 31 Drugs in 2021

More than 700 prescription medications have seen price hikes so far this year. Here’s a look at the worst.

The 10 Golden Rules of Becoming a Millionaire
The 10 Golden Rules of Becoming a Millionaire

I’m a millionaire several times over. I got here the same way you can — by following these simple steps.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.