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529 plans: A new way to save tax-free for K-12

February 28, 2018

A tool for saving for college has been expanded to elementary and secondary education.

Through 529 plans, investments grow free of federal taxes, and withdrawals are free of federal taxes when spent on qualified education expenses for elementary, secondary or higher education. Parents, grandparents, godparents, aunts, uncles and anyone interested in helping provide for a child’s education may contribute.

How does it work?

  • An account may be established for the benefit of an individual, and contributions may be made starting at birth and continued throughout the beneficiary’s education.
  • Contributions may be made to one or more accounts by one or more individuals without income restrictions on contributors or beneficiaries.
  • Money inside of the account may generally be invested in stocks, bonds, mutual funds, ETFs and other investments.
  • As it grows, future income and growth inside of the account is not federally taxed.
  • Future withdrawals are generally free of federal taxes if they are used for qualified education expenses.
  • Up to $10,000 may be withdrawn annually for elementary or secondary education expenses.

What can the account be used for?

  • Distributions from the account are federally tax-free to the extent they are used for qualified education expenses.
  • Qualified education expenses include tuition, books, supplies, tutoring, transportation, computer costs and certain other costs.
  • Qualified education expenses are those incurred for elementary or secondary school, as well as college.

Example

As soon as twins Joseph and Mary were born, their loved ones began providing for their Catholic education.

On January 1, 2018, the children were born. Grandpa and Grandma decided to make a gift toward the Catholic education of their new grandchildren, and they began by opening a 529 account for each child and contributing $500 to each.

At Joseph’s and Mary’s baptism, Grandpa and Grandma made another $500 contribution to each child’s account. Inspired by the grandparents, the godparents collectively made an additional contribution of $500 to each 529 account. The parents of Joseph and Mary also put $1,000 into each 529 account.

The parents, grandparents, and godparents of Joseph and Mary collectively contributed $2,000 to each child’s 529 account in each of the following four years. In the meantime, the investments inside of the account did well and increased in value from $10,500 to $12,000*, by the time Joseph and Mary were ready for kindergarten at their parish Catholic school!

At this time, Joseph’s and Mary’s parents could choose to begin using the children’s 529 accounts to pay qualified education expenses, or they could choose to allow the accounts to continue growing. In this example, by the time Joseph and Mary are ready for high school, assuming the same annual contributions continue without any withdrawals and an annual return of 4%, the accounts would have accumulated to more than $35,000 apiece. These funds could now be used to assist with high school. Any amount not used for K-12 education will be available for college education.

Additional scenarios

  • Loved ones have collectively contributed $500 a year to a child’s 529 account for 10 years beginning at birth. Without any withdrawals and assuming an annual interest of 4%, the account is now worth more than $6,000*.
  • Loved ones have collectively contributed $5,000 a year to a child’s 529 account for 10 years beginning at birth. Without any withdrawals and assuming an annual interest of 4%, the account is now worth more than $62,000*.

How do I begin saving with a 529 plan?

  • Speak with your financial advisor or tax advisor regarding opening up an account.
  • For more information, visit MIsaves.com.

* Please note that most investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Also, the Diocese of Grand Rapids is not a sponsor of 529 plans.