Congress recently approved changes to the 529 Plan tax code and law that would open it up for private K-12 education expenses. (That seems pretty awesome, considering how much time military families spend stressing about where to send their children to school.)
Not so fast, though.
These rule changes are so new that there is a lot still undecided and undetermined. Fixing things on a national and state level could take until 2020. . . or longer.
The 411 on 529s
529 Plans were created in the 1990s to help families save for college while also reaping tax benefits. Families could begin paying into a plan– tax-free or with a tax credit in some states–when their children were infants. Over time, that annual contribution grows into a nice fund just in time to pay for college.
Each state offers different packages and incentives. A 529 Plan is governed and run by the state in which it is located. This does not really need to match up with where a family is physically located or where a college student goes to school. For example, a family living in California could, in theory, have a 529 Plan in Texas for a student attending college in Maine. This is great way for many families, including military families, to stash cash for higher education. It’s not free money or money from the government; it’s an investment of your own money that accrues interest over time as a growth method.
Changes to the plan
With the new law, there are new K-12 possibilities to explore. First, changes to the national 529 Plan mean that up to $10,000 per year could be used to offset the cost of private K-12 education. It sounds great: Cheaper private school, perfect! Many military families have concerns about the quality of public schools near certain bases.
It’s important to note the major difference between the college and K-12 529 Plan uses are how the money can be used. Funds can be used in a variety of ways to pay for college, from tuition and fees to textbooks and computers. Funds withdrawn from a 520 Plan for K-12 education can only be used for tuition.
Financial analysts have predicted that many families might be investing in the Plan as fast as they are withdrawing. This means that the Plan might only show significant benefits for affluent families. The fast turnover of money means the funds won’t have time to collect interest and grow
What it all may mean for milfams
The ins and outs of how the 529 Plan will work for K-12 education are fuzzy (as of press time). There is guidance about how to use it for college: Pick a plan in any state, invest over time, withdraw, and use at colleges across the country.
It is unclear if this is still true for the K-12 portion of the 529 Plan. If we assume that it is, then things will work as before. Families invest in any state plan regardless of where they live, withdraw funds, and use them at a private K-12 school of their choice across the country.
If this is not the case, this could impact the ability of military families to take full advantage of the new 529 Plan. If students need to have a plan in the same state where they attend a K-12 private school, this means that military families will be transferring their plans every 2.5 years, on average.
Transferring a plan is currently possible only once during a 12-month period. For families at duty stations for less than a year, this could mean that your plan is stuck in a place you no longer live. Additionally, each state has its own rules about what happens when a plan is transferred. Some states charge a fee to transfer plans to other states. Other states will require you to repay the tax credit you earned through the 529 Plan. For military families on the move, this could end up costing more money than the 529 Plan is saving.
On the other hand, it could be a good thing. Military families may be able to start saving now for a potential duty station with less-than-ideal public schools. And if they luck out with great schools through senior year, then the funds can roll over into college.
Before anyone rushes out to invest in a 529 Plan, it’s important to consider that this is a brand-new law. With so much left undecided or unclear, even to 529 Plan experts and administrators, making a hasty investment is not advised. This is especially true for families interested in using the 529 Plan for K-12 education. Not every state full supports this option in their own tax code, making the plan virtually unusable. It may take years for individual state tax codes to match the federal law.
Instead, consider investing in a 529 Plan to help offset the cost of higher education for your child. Proceed with caution and a “wait and see” attitude for potential 529 Plan uses in private K-12 education.
By Meg Flanagan