The New and Improved 529 Plan

529 plans are no longer just for college.  The recently passed “Tax Cuts and Jobs Act” added a provision that expands eligible education expenses to include $10,000 per child for elementary and secondary tuition. So parents who plan on sending their children to one of Jackson’s many private schools should take advantage.

Specifically, the new bill adds the following paragraph to Section 529(c) of the tax code:

“Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.”

A 529 plan is essentially an IRA for education. Depending on the state, you can receive a small tax incentive to put money away for your child’s education, allow funds within the account to grow tax-free, and make withdrawals for “qualified education expenses” without triggering income tax.

More specifically, if you use the Mississippi Affordable College Savings (MACS) Program, you can receive a state tax deduction for up to $20,000 ($10,000 for single taxpayers) of 529 contributions per family, which would provide approximately $1,000 ($500 for single taxpayers) in state income tax savings.

But the greatest advantage is the federal and state tax-free growth. So the earlier you make contributions, the more time your account can accumulate tax-free earnings. Even before this new bill, 529 plans were a great savings tool for college. But now that up to $10,000 per child can be used for elementary and secondary education, the advantage is incredible.

For example, assume you are going to pay $10,000 per year for private school—kindergarten through twelfth grade, which is thirteen years of tuition payments. Instead of waiting until your child is six to pay for kindergarten, what if you started making payments into a 529 account when they are born? In other words, instead of paying $10,000 per year in tuition from ages 6-18, you make contributions in the same amount to a 529 plan from ages 0-12.

Assuming a 6% return on your money (S&P was up 21.83% in 2017 and down 37.0% in 2008), even after paying $10,000 in tuition from the 529 account for kindergarten through twelfth grade, there would still be over $83,000 left in the account to apply toward college. Not to mention that in each year of contribution you would also get the roughly $500 in state income tax savings.

Now, obviously not every couple has $10,000 to spare upon the birth of each child. But even if you cannot come up with the money to fund a 529 account years in advance, there seems to be nothing prohibiting you from using it as a conduit just to receive the state income tax break (i.e. depositing tuition into a 529 account and immediately withdrawing it to pay for school). Of course, Mississippi legislature could close that loophole like Montana and Wisconsin recently have, but until then, it appears to be fair game.

Bottom line, if you send or plan to send your children to private school, you should definitely consider funding a 529 account. And if you are fortunate enough to already have an account funded for your children through grandparents or other relatives, you should consider using the account for private school tuition payments.