A 529 Plan Tax Strategy for Primary & Secondary Private School Parents in Most States, Including Ohio

Thursday, October 3, 2019 |

Illustration by Dave Urban

A lesser known impact of the 2017 Tax Cuts and Jobs Act was the change in provisions of 529 plans. Named after its tax code section, a 529 plan is a savings vehicle traditionally used to pay for college expenses. Contributions are made with after-tax dollars, but qualified withdrawals (such as tuition, books, room and board, etc.) are tax-free, as are the earnings accumulated over time. As a result of the tax reform bill, up to $10,000 can be withdrawn annually for kindergarten through high school educational expenses.

So how does this help the family who is working hard just to pay current educational expenses? Consider these facts:

Knowing this, the simple strategy is to make 529 plan contributions in the amount of current tuition expenses and withdraw that same amount soon thereafter. An example:

  • Jon and Megan have three children, all of whom are currently enrolled in a private elementary school, with annual tuition of $6,000 per student ($18,000 total). Jon and Megan are currently paying the full tuition out of pocket.
  • Conversely, if they would open a separate 529 account for each child, Jon and Megan could deposit the total of $18,000 ($6,000 to each of the children’s accounts) either at once or in periodic installments and invest in the appropriate cash investment option.
  • When tuition is due, they can then withdraw the required amount to pay the school. The interest earned is tax-free, the withdrawal is tax-free, and Jon and Megan can reduce their Ohio taxable income by $12,000 in that tax year ($4,000 per student).
  • Additionally, they can carry over $6,000 annually ($18,000 - $12,000 = $6,000, the difference between their total annual contributions made and the annual allowable deduction for 3 children) to future tax years when they are no longer making contributions to the 529 plans. Over the course of 13 years of education, that can add up to an additional 6½ years of the maximum deduction for expenses they were paying anyhow.

Consider keeping 529 assets separate; that is, if you are currently saving for college in a 529, consider opening a new account for the purpose of this strategy. Mixing the contributions in one account may lead an individual to be careless in making an equal amount of contributions for current educational expense withdrawals. You do not want to rob Peter’s college fund to pay Paul’s 5th grade tuition.

Note that educational institutions at various levels may treat 529 plan accounts differently when it comes to determining financial aid. Specifically, the distributions received from non-parent owned 529 plans may be treated as income to the student, and 529 plan account balances are counted in the Expected Family Contribution amount of the FAFSA formula (the percentage varies depending on the owner). Discussing the various strategies and rules with a financial advisor is recommended, and it’s not too late to open a 529 account for the 2019 tax year.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. Tax services are not offered through, or supervised by, Lincoln Investment or Capital Analysts.

Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.

Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other education expenses or that a beneficiary will be admitted to or permitted to continue to attend an educational institution. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals.

An investor should consider, before investing, whether the investor's or designated beneficiary’s home state offers any favorable state tax treatment or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. Furthermore, the Tax Cuts and Jobs Act that was signed into law on December 22, 2017 allows for up to $10,000 a year per beneficiary in tax free distributions from a 529 Plan if used for tuition incurred for enrollment or attendance at a public, private, or religious elementary or secondary school. Check with your state’s guidelines prior to withdrawing the funds.

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