The recently enacted Tax Cuts and Jobs Act makes it possible to set aside funds that can both accumulate and be withdrawn tax-free to pay for tuition at public, private or religious elementary and secondary schools—at least at the federal level. The amount that may be withdrawn for elementary and secondary school is limited to $10,000 per pupil per year.
These education savings accounts commonly are identified as “529 Accounts” after the Internal Revenue Code Section that authorizes their creation. Before 2018, 529 Account expenditures could be used only for “qualified higher education expenses” that included tuition, books and room and board for post-secondary education. There is no limit on the amount that can be withdrawn for such qualified higher education expenses.
529 Accounts are authorized by federal law but are administered under state law. The ability to use 529 Accounts for elementary and secondary school tuition depends on whether state law follows the change to federal law or, instead, limits 529 Account distributions to payments for higher education only. Indeed, some states may penalize withdrawals for elementary or secondary school tuition. Before contributing to or withdrawing from a 529 Account for the expanded purposes, individuals should be sure the state program under which the account is administered permits such expenditures without penalty.
There are limits on the annual and total amounts that can be deposited into 529 Accounts, but those limits are generous. For example, a parent or grandparent could transfer, in a single year, up to 5-years’ of a donor’s annual exclusion amounts ($15,000 X 5 years or $75,000 in a single year). After 5 years, another deposit may be made until a cap fixed by state law is reached.
The expansion of the use of 529 Accounts for tuition at elementary and secondary schools makes them more attractive than ever provided state law conforms to the new federal expansion.