Saving for Education in a Strategic Way

By Anakaren Godinez

Saving for education has always been a popular topic in our office for parents and grandparents alike. 529 plans often come up in the conversation regarding saving for college. For those you that don’t know, a 529 Plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 Plans provide “tax-free” growth on the contributions when used for qualified education expenses. They provide federal pre-tax savings like a 401(k) or Traditional IRA. Because of their limitations, 529 plans have never been the sole approach to funding education costs for our clients. Despite their imperfections, the new Tax Cut and Jobs Act that went into effect for 2018 provides for some unique education planning strategies.

First, 529 plans can now be used to fund any private and/or religious education (as well as homeschooling) from Kindergarten to 12th grade. Until 2018, 529 plans could only be used for college costs and their related higher education cost.

We know many people send their children to private school at a significant out of pocket expense. The implication of this tax law change is that parents / grandparents can now make a contribution to a 529 plan, potentially receive a state tax deduction or credit, and then immediately pull the money out to pay for private school.

Certain states allow you to deduct the amount of your contributions up to a certain limit. Only 9 states do not offer these incentives, and unfortunately, our home in California is one of them. For a married couple living in Chicago and sending their two children to private school, simply contributing $20,000 to your 529 plan and taking it immediately out to pay for school will result in nearly $1,000 in tax savings.

The complete list of the states that DO NOT offer any deductions are Alaska, California, Delaware, Florida, Hawaii, Kentucky, Maine, Nevada, New Hampshire, New Jersey, North Carolina, South Dakota, Tennessee, Texas, Washington and Wyoming. All of the other states some type of 529 savings incentive. Although there are some state tax benefits for these types of plans, there are no deductions at the federal level.

If your state does not offer deductions or credits for contributing to a 529 plan, do not let this deter you from strategically saving for education. The 529 plan is not the end all be all and there are other ways to strategically fund future education in a tax-advantaged way.

Do some research about the possible benefits your state can offer you by contributing to a 529 plan. Savingforcollege.com summarizes the benefits per 529 plan per state. Some states have more than one 529 plan. If you have any questions regarding your education savings methods, do not hesitate to reach out.