Question: What are the new rules for using money in a 529 college-savings plan for kindergarten through 12th-grade expenses, rather than just college?
Answer: The new tax law expanded the definition of eligible expenses for 529s. You can now withdraw up to $10,000 from a 529 each year tax-free to pay tuition for kindergarten through 12th grade. You can still use 529 money tax-free for college expenses, too, with no annual limit. Eligible college expenses include tuition and fees, room and board (even an off-campus apartment for a student who goes to school at least half-time), books and a computer. For more information about eligible expenses, see the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education.
The new tax law left some unknowns. Some states need to change their laws to coordinate with the new federal law. Otherwise, they could end up charging state income taxes and a 10% penalty for withdrawals that aren’t used for college, says Susie Bauer, senior vice president and 529 manager at Baird Private Wealth Management. Also, if you received a tax deduction for your contribution, you may have to repay it if you use the money for non-qualified expenses and your state doesn't change its rules. Contact your plan before taking money out of the 529 for K-12 tuition to make sure the withdrawal is a qualified expense in your state. If your state’s rules aren’t clear yet, you may want to wait a few months before taking a precollege withdrawal. More states should be clarifying their laws in the next few months.
You may also want to adjust your investments. “If you’re going to take advantage of the K-12 tuition change, you need to take into account your time horizon,” says Roger Young, a senior financial planner at T. Rowe Price. Depending on your child’s age, you may be taking those withdrawals much earlier than you had originally intended, particularly if you invested in an age-based fund whose mix of stocks and bonds are tied to the year your child will start college. In that case, you may want to shift some money you plan to withdraw for K-12 expenses in the next few years to more conservative investments, so you won’t have to worry about market volatility when the tuition bill is due. And because you can change your 529 investments only twice per year, consider keeping the current money invested where it is but adding new contributions to conservative investments for short-term expenses, says Young.
Even though you can now use some money from your 529 for K-12 tuition, think carefully before taking that withdrawal. “With the shorter time horizon, you’re probably going to be more conservative and will probably have less gain potential,” says Young. “For people who aren’t in a high tax bracket, you have to ask: ‘Does this really make sense to me?’ ” The longer you keep the money growing in the account, the more time you’ll have to benefit from the tax-free gains for eligible expenses.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
Stock Market Today: Stocks Close Higher After Strong November Jobs Report
The unemployment rate ticked lower last month, while annual wage growth eased.
By Karee Venema Published
Student Loan Debt: Another $4.8B Forgiven
Biden announces $4.8 billion in student loan debt relief for more than 80,000 borrowers.
By Jamie Feldman Published
Year-End Tax Planning for a Financially Healthier Retirement
Getting your tax ducks in a row for the end of the year can decrease your tax liability and make the most of your income, now and in retirement.
By Ryan Marston, Investment Adviser Representative Published
Three Ways You Can Flip the Script on Your Taxes
Does it feel like the tax code is beating you up at times? Instead of accepting that feeling of getting pushed around, here’s how you can pay what you must but no more.
By Scott M. Dougan, RFC, Investment Adviser Published
Deferring Taxes Until Retirement? You May Want to Rethink That
If tax rates go up in the future (such as when provisions in the TCJA sunset), that could lead to a bigger tax hit, depending on the types of accounts you have.
By Scott Noble, CPA/PFS Published
IRS Announces Florida Tax Relief Following Hurricane Idalia
Tax Deadline In response to the severe damage caused by Hurricane Idalia, the IRS has extended tax deadlines for affected Floridians.
By Kiana Curtis Published
Qualified Opportunity Zones With an Energy Boost
The energy sector, where investors can combine qualified opportunity fund perks with oil and gas direct investment tax benefits, is one of the more appealing and lesser-understood QOZ offerings available.
By Daniel Goodwin Published
Warning: Watch Out for New IRS Refund Mail Scam
Tax Scams If you receive a cardboard envelope appearing to be from the IRS about an unclaimed tax refund, be cautious. It’s a new scam.
By Kelley R. Taylor Last updated
What to Do Before the Tax Cuts and Jobs Act Provisions Sunset
Parts of TCJA (also known as the Trump tax cuts) are set to expire by the end of 2025, so the sooner you act, the more options you’ll have to take advantage of today's lower taxes.
By Martin Schamis, CFP® Published
Your Frequently Asked Tax Questions Answered: Kiplinger Tax Letter
Kiplinger Tax Letter The Kiplinger Tax Letter receives a lot of reader tax questions and its editor, Joy Taylor answers a selection of them.
By Joy Taylor Published