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529 Plans No Longer Just for College Savings

The popular tax-free accounts can now be used to pay for private K-12 schools

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The new tax law expands 529 savings accounts to include K-12 education costs.

En español | Under the new tax law, families and grandparents with children in private and religious schools will now be able to use savings plans that previously were reserved for college costs to help pay for the kids’ K-12 education.

Created in 1996, 529 plans allow families to set aside money for college in a tax-free savings and investment account, similar to an IRA. Under the new tax law, families will now be able to use these accounts to pay for up to $10,000 per year per beneficiary in tuition for K-12-aged children. The withdrawals are not taxed federally.

This new use of 529 plans “will encourage [families] to contribute more money earlier in a child’s life,” said Myra McGovern, vice president of media for the National Association of Independent Schools.

Forty-nine states and the District of Columbia offer such plans, and 33 states give a state tax break to parents, grandparents or friends who contribute to one of these accounts. (Wyoming is the only state that does not offer a 529 plan.) Supporters of increased school choice urged Congress to expand the use of 529 plans as the tax overhaul legislation was being debated late last year. Many state laws governing 529 plans will now need to be rewritten to allow for K-12 use, as they were initially set up for higher education expenses, according to James DiUlio, a spokesperson for the College Savings Plans Network.

While it is “kind of early in the game” to say what impact this change will have on saving for college, “by and large, I think it’s good because our business is educating kids,” DiUlio said.

And business has been successful for 529 plans. According to the most recent data available from the College Savings Plans Network, total U.S. investment in 529 plans has reached $275.1 billion. By December 2016, the 12.9 million accounts averaged just over $21,000 per account. Contributions to 529 accounts hit nearly $27 billion that year. DiUlio said early 2017 projections show that total investment will be over $300 billion.

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