Last week the House passed the new tax bill, and in it, they signed into law that you can now pay for private schooling with your 529 plan. Doesn't sound like a big deal, and I really haven't heard much about it. For a few of the articles it is made to sound like the bill was passed for the “rich”, but for the middle and lower class, it creates options. Options to save a few dollars on private education.
If you are like me, more than likely you've been saving a few dollars each year for your kid's college education and hoping to have a little nest egg to help you weather the financial tsunami of paying for college. However, when this bill came along it opened my eyes to a few options that you may not realize you have. Let me give you my example:
- Residence: Nebraska
- 529 Plan: Nest529Direct
- Tax Deductible Contribution: up to $10,000 (per family) or $5,000/each (if filing separately)
- Nebraska State Tax Rate: 7%
- Private School Costs (estimate): $14,000 (for my three kids)
- Contribution Stipulations: None – there is no minimum required holding period
So, in my instance, I have a few options to kick into action a prepayment plan in my state (Nebraska), because I can both get a deduction, and be able to prepay my kids' tuition in August directly from my 529 plan. This prevents me taking advantage of the tax-free compounding I could enjoy if I let the investments sit in their accounts until college. I can hear people chiming in now with their opinions!! :) However, the old saying of “bird in hand is worth two in the bush“, comes to mind when I think about the options I have with the passing of this tax bill. For me, since I already know that I will be prepaying tuition in August, then I have a great way of guaranteeing myself some savings on money I know I will be spending regardless. To me it comes down to numbers and how much could I save on private education by leveraging my 529 plan. Here is a breakdown of how I can leverage the 529 plan contribution and saving more than $1,000 on private education in 2018.
- Contribution (by Dec 31, 2017): $10,000
- Tax Deduction Refund: $10,000 x 7% = $700
- Contribution Interest: $10,000 x 6% (estimated return) x .5 (six months) = $300
- Prepay Tuition Discount (entire year by Aug 2018): $14,000 x 3% = $420
- Total Savings by using our 529 plan: $1,420
For a lot of people that may not seem like much, but for people paying for private education that can be a huge factor. A lot of lower and middle-class families are already stretching pennies in order to afford the opportunity of even doing private education. For me, I get excited when I hear of something like this! So excited I could shout these savings from the rooftops! I mean come on…who wouldn't want to save 10% or $1,420?!?!?!
Now my situation may be different than yours. You need to check your state laws on:
- Are your contributions tax deductible?
- Are there any limitations on when you can withdraw the funds?
- Does your state have any holding period limitations?
I highly urge you, that if you are considering this option that you make sure you check your state tax laws and seek out a professional accountants advice! But hurry, because you need to act quick! For most states, the contributions need to be made prior to December 31, in order receive your 2017 tax deduction.
I'd be interested in hearing your thoughts on how this changes your contributions and withdrawals from your state's 529 plan? Would you use the 529 plan to prepay tuition like I'm thinking about doing? Chime in below, and drop a comment! I'd love to hear from you!