What is a 529 Plan? A 529 plan is a special, tax-advantaged account designed to encourage saving for college (including certain post-secondary yeshivos). The federal tax advantage is that earnings on funds contributed to 529 accounts are not federally taxed.
Example: Parent deposits $1,000 into Child’s 529 account at Child’s birth. The 529 account is worth $2,500 when Child attends college. If the $2,500 is properly used to pay college expenses, there is no federal tax on the $1,500 earned.
Yes! In many states, the principal contributed to the plan is deductible for state income taxes. State laws on this point vary widely.
Example: NYS Parent deposits $10,000 into Child’s NYS 529 account to save for college. If Parent’s income was $100,000 that year, after the 529 contribution, NYS will view that income as $90,000. Depending on Parent’s specific tax circumstances, Parent can realize a NYS tax benefit of several hundred dollars. NYC residents, and those in higher tax brackets, would realize significantly greater tax benefits.
Yes. Upromise, a Sallie Mae company, offers automatic deposits to 529 accounts, at no cost to account holders, of up to 5% of retail, travel, and other purchases when paid by a Upromise linked credit card. These free contributions may not be game-changing, but they add up.
Also, the availability of a tax-advantaged account, with tax advantages for contributors in certain states, incentivizes assistance from friends or family who may not have otherwise assisted.
While 529 accounts have been available for use toward paying college expenses for decades, effective 1/1/2018, federal law expands the allowable use of 529s to include K-12 expenses.
In addition to being a significant, symbolic, national school-choice victory, encouraged by Agudath Israel and other groups as part of our tax advocacy efforts on the federal level, it means that a new, beneficial vehicle will be available for the tremendous expense our community bears in paying yeshiva tuition. Parents (and others) can set up and deposit money in 529 accounts, have that money grow federally tax-free, and use the funds for K-12 yeshiva tuition.
That is a critical question now. If allowed, this would be of further assistance to yeshiva parents. K-12 state deductibility would allow parents to attain long-term (federal) benefits, and more immediate (state) benefits.
Caveat #1: States have not yet legislatively reacted to the new federal law. Some states may adjust their laws to favorably embrace K-12 expenses to complement their existing college savings deduction benefits, others may not.
Caveat #2: Benefit specifics vary widely from state to state. New York allows a maximum deduction of $10,000 per year for married filing joint filers. New Jersey offers NO state tax deduction, although it does offer a limited matching college scholarship program for 529 deposits. (More on that coming soon from Agudah’s NJ Director, Rabbi Avi Schnall.) Colorado allows generous deductions for 529 contributions. States like Florida or Texas, that have no state income tax, obviously do not offer state tax deductions.
Excellent overview of state tax benefits, limitations, and application links here.
The greatest tax benefit will come from keeping funds in the 529 account for a longer period, so growth occurs federally tax-free. However, it is possible to realize the state tax benefit, if applicable, even if funds are withdrawn for K-12 tuition sooner, if the state-specific holding period is complied with. Check with your tax adviser for details.
Agudah is engaged in a coordinated, multi-state approach on this issue, following the successful K-12 expansion at the federal level.
The multi-pronged approach includes:
- Advocating that states which do not currently offer a state 529 benefit, now introduce one.
- Advocating that states embrace the new, broader federal definition of 529s which encompasses K-12 expenses.
- Defensively moving to protect 529s at the state level from current efforts to limit its applicability.
- Advocating to raise annual state deduction limits, and streamline other plan limitations, which were initially created for the more narrow purpose of college savings.
- Stay tuned for updates from us and other sources on this developing issue.
- Consult with your personal accountant or financial adviser to determine if a 529 account is appropriate for you.
- We have opened a dedicated inbox – [email protected] – for comments on this issue.
Due to the volume of submissions expected nationally, we intend to read every comment, but you will likely not receive a response beyond an automated acknowledgment. This mailbox is not designed for individual tax questions.
- Is a 529 account right for me?
- What are the specific benefits and limitations of 529 accounts in my state?
- Am I better off waiting until my state clarifies its 529 rules before taking action?
- What impact does 529 savings have on financial aid?
- What is the interplay between 529 contributions and gift tax limits?
This is a community service update. It is not tax advice.
Consult with your tax adviser to determine your best course of action.
Thank you for this article. It is concise, informative and easy to understand.
I am not a tax preparer, but I understand the main hinted gain here is that u can have your tuition payments be tax deductible, assuming u put them into a 529 accnt and wait the min holding period. Forget the fact it grows tax free, its all deductible from ur income. Maybe I should the article again……..
Mb, the money is not tax free. it’s after tax money that can be put in to 529. Only the accured interest is tax free.
@mb bring that NJ doesn’t offer any tax benefit, there is no holding period & no benefit on a state level. On the federal level you will only gain on the income generated not on the principal.
And, you have to use the money for accredited schooling. If you use it for something else….you have to pay taxes on all the accumulated income. Be careful…..