Section 529 Plans and Tax Reform

By January 8, 2018 News No Comments

Recently, the broad tax reform bill, known as the Tax Cuts and Jobs Act, was signed into law and introduced significant changes to Section 529 college savings plans. The Act now allows tax-free withdrawals of up to $10,000 a year from Section 529 plans to cover qualifying private elementary and secondary school expenses.

Although relatively unknown and underused, Section 529 plans emerged in the 1980s as an incentive to encourage saving for college. Plans are operated by the states, however growth and withdrawals for qualifying post-secondary education expenses are free of federal tax. In Illinois, contributions to a Section 529 plan are deductible against state income tax up to $10,000 for single filers, and $20,000 for married couples. Families capable of investing a significant amount of money early on in a plan receive the greatest benefits of tax-free growth and tax-free withdrawals for college expenses, benefits of which are now applicable to saving and spending related to elementary and secondary private schooling.

Families may now withdraw up to $10,000 from Section 529 plans to cover qualifying private elementary and secondary education expenses. Money invested into Section 529 plans will be deductible against state income tax, growth within the plan and qualifying withdrawals will be free of federal tax. Alternative plans do exist for the purpose of saving for private education, but the plans are generally less generous and wealthier families often do not qualify.

Ultimately, the effect of the act remains to be seen. Arguments from both sides of the aisle have emerged claiming that this provision of the Act further expands the tools available to the school choice proponents, while others argue that this provision may aid families previously incapable of affording private school. The Secretary of Education, referring to the expansion of Section 529 plans, provided, “[it] is a common-sense reform that reflects the reality that we must begin to view education as an investment in individual students, not systems.” Only time will tell if the new provisions in the Act will increase the popularity and use of Section 529 plans.

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