Maximizing the Savings with 529 Plans

One huge change in the recent Tax Cuts and Jobs Act applies to 529 college savings accounts. Up until now, 529s have been chiefly used as savings vehicles for college expenses. Now there is another way you can use a 529: to pay K–12 tuition.

What does this mean for you? If your child is in kindergarten through 12th grade, and you write a tuition check, consider writing that check to a 529 plan instead. Then immediately pay your tuition bill from the 529 account (or reimburse yourself if you’ve already paid). The resulting deduction on your state taxes in effect may give you a 5%–6% discount on tuition in Missouri (or 5.7% discount in Kansas).

How does it work? Let’s consider the math for this region. Missouri residents can deduct up to $8,000 of 529 contributions per child per year on their state income tax. (Kansas residents can deduct $3,000 per child; Illinois residents can deduct $10,000 per child per year.) Married spouses can each claim the deduction per child, doubling the deduction. Parents can then immediately use those contributions to pay their child’s K–12 tuition bill. The result is that part of the tuition payment you were going to make anyway is now deductible on your state income tax.

There is one important limitation. The new rule limits the amount you can take from a 529 to pay K–12 tuition to $10,000 per child annually. Depending on your tuition bill, the amount you can use for K-12 tuition may not be enough to cover your whole bill.

If you are already making 529 contributions in anticipation of college expenses, this approach may not really help you if you are already getting the full benefit of the tax deduction. Talk to your advisor to determine the best solution for you.

It’s also important to note that it may take some planning to coordinate passing money through the 529 accounts to pay tuition on time. August and January can see slow processing times, as many people are paying college tuition bills during these months. Plan ahead.

Finally, consider this tip. You can shuffle 529 contributions around in a family. So if you have a child who is not yet school age, you can make a contribution to that child’s account and get the tax deduction. Then you can transfer that money to the school-age child’s account and apply it to their tuition.

Grandparents can also open 529 accounts for grandchildren. Grandparents who contribute to a 529 account would get their own tax deduction for money they contribute. But they are still governed by the $10,000 per year maximum per child for tuition.

These ideas may not necessarily be a good fit for every situation. Consult your tax or financial advisor for personalized advice on how this might work for your family.

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About Rob O'Blennis

Rob R. O’Blennis is a graduate of the University of Kansas and the Washington University School of Law and is now working as a CCO & Senior VP of Wealth Management in St. Louis. He practiced law for six years as an estate-planning attorney. After making the change to the financial industry, he now considers himself a recovering lawyer.

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About Rob O'Blennis

Rob R. O’Blennis is a graduate of the University of Kansas and the Washington University School of Law and is now working as a CCO & Senior VP of Wealth Management in St. Louis. He practiced law for six years as an estate-planning attorney. After making the change to the financial industry, he now considers himself a recovering lawyer.