Families with children enrolled at Winchester Thurston School have not begun asking how they can use 529 plans to pay the private school tuition, but administrators at the Shadyside-based private prep school believe that’s only because many of them still have unanswered questions.
“While the new federal tax law has made provisions for families to use 529s for K-12 education, the state of Pennsylvania is still determining how it will treat these withdrawals from a tax perspective,” said Nancy-Rose Netchi, director of marketing and communications at Winchester Thurston School.
“We expect some families may choose to exercise the 529 option if they find it’s beneficial to them after consulting with their tax adviser,” she said. “From our perspective, the new 529 provision simply gives some families an additional vehicle they can use to invest in an independent school education.”
While the federal tax overhaul made withdrawals for K-12 tuition tax-free, 529 plans are administered by states, and not every state law automatically complies with the new rules. The problem is some state legislation specifies that a 529 plan must be used for “higher education,” while other states simply follow the federal code.
Pennsylvania Treasury officials, however, cleared up any confusion in late January when it confirmed that K-12 withdrawals will be treated as qualified for the purposes of Pennsylvania income tax, just like any other qualified withdrawal.
“PA 529 account owners are currently able to make qualified withdrawals for K-12 expenses,” said a statement released by the Pennsylvania Treasury when making the announcement.
It used to be that money invested in 529 college savings plans could only be used for college expenses. However, the Republican-sponsored Tax Cuts and Jobs Act, which went into effect this year will expand the benefits by giving parents the option to use the funds in the plan to send their children to private grade schools.
The new tax law includes a change that allows families to withdraw up to $10,000 a year tax-free to use for “Public, private or religious or elementary school” expenses.
“Although we anticipate that the majority of participants will continue to focus on the benefits of long-term planning and saving for high education, this expansion does provide flexibility for families and recognizes the variety of education options available to students today,” said Richard Polimeni, chairman of the Washington, D.C.-based College Savings Foundation.
A 529 is a tax-advantaged savings plan that was originally designed to assist families in paying for college expenses. Unlike custodial accounts, which are taxable based upon income and capital gains, funds used for qualified educational expenses grow federal tax-free within a 529 plan, allowing more of a family’s savings to be used for tuition and less of it going toward taxes.
Previously, the Coverdale Education Savings Account, which may be eliminated with the proposed tax reform, was the most well-known way to save for K-12 in a tax-advantaged way. However, families could only save up to $2,000 a year per child with a Coverdale account.
Mark Kantrowitz, a Chicago-based student financial aid expert and publisher of the website Privatestudentloans.guru, said the $10,000 qualified distribution will potentially enable some families to pay for private elementary and secondary school tuition, but there are some caveats.
“Since the money will not have been invested as long, it will not have as long for the earnings to compound,” Mr. Kantrowitz said. “Also, if students are applying for need-based aid for K-12 education the 529 plan may be considered an asset that can be used to pay for it whereas before that money was just for college.”
Family members and friends are each allowed to contribute a maximum of $15,000 this year to a 529 plan without incurring a gift tax. Although contributions are not deductible on federal tax returns, earnings on a 529 plan grow federal tax-free and will not be taxed when the money is taken out for college.
While some states allow for a state income tax deduction for contributions to a 529 plan, many do not. Pennsylvania has one of the most generous state deductions for 529 plan contributions. This year, that figure also increased to $15,000 per person.
Tim Grant: tgrant@post-gazette.com or 412-263-1591.
First Published: February 13, 2018, 2:06 a.m.
