529 College Savings Plans Can Now Be Used for K-12 Expenses: How Are States Responding?
The federal government has expanded 529 college savings plans to include qualified expenses for elementary and secondary education (public, private or religious). In doing so, educational opportunity has increased for families across the country. Now, in addition to using account funds for college expenses, a family can choose to use up to $10,000 annually toward qualified K-12 expenses.
It’s important for state policymakers to understand the benefits of 529 plans and how these plans can help families because of this expansion. The goal of this memo, 529 Savings Plans for K-12 Students – What Happens Now? prepared by the American Federation for Children, EdChoice and ExcelinEd, is to answer many of the questions currently being asked about the change.
Tax-advantaged 529 plans were originally designed to incentivize saving for future college costs by allowing a person, on behalf of a child or grandchild, to invest for the student’s education and be free of federal income tax on the investment account’s growth. More than 30 states also allow tax deductions or credits for contributions made to the accounts. As described in the memo, many states are still determining details on how they will respond to federal expansion of this savings program.
A key benefit of 529 plans is the potential for compounded, tax-free growth on account funds. As with other investments, the earlier that funds are placed in the account and left untouched, the more the funds can grow over the years. If significant portions of funds are used early in a child’s education, as the expanded 529 plan now allows, the funds will have less growth potential. Fortunately, the 529 funds do not have to be used every year of K-12. A family can pick and choose when and if they want to use the funds to meet the unique educational needs of a child. Any funds remaining in the account would still have growth potential for future use in college.
The expansion of 529 savings plans to include qualified K-12 expenses will help to expand educational opportunity for many families. It’s worth remembering that low-income families often do not have the financial means to contribute extra dollars to 529 plans. Additional efforts are needed in every state to increase opportunity for those who need it most, because every child, in every household, deserves access to a high-quality education.
*This blog post was first published at ExcelinEd.