A New Expanded Use of 529 Plans
Near the end of 2017, the Tax Cuts and Jobs Act (TCJA) was passed into law; included in
the new law is the expanded use of 529 plans. While all the features and benefits of the
529 plan for college and other post-secondary education remain, the new law allows 529
plan account owners to also use the funds to pay for tuition and other authorized expenses
at K-12 schools – including public, private, and religious schools. The 529 plan account
owner is limited to a maximum withdrawal of $10,000 per beneficiary each year for such
expenses.
While withdrawals for qualified K-12 expenses are free from federal tax, each state has
its own tax laws pertaining to 529 plans; currently only about 20 states are allowing state
tax-free distributions from 529 plans when used for K-12 expenses. At this time,
California does not follow the federal definition for its own 529 laws – thus any earnings
withdrawn for K-12 purposes would be subject to state tax. However, there is a chance
that California and other states may eventually decide to conform with federal tax laws
pertaining to 529 plans.
For the time being, we recommend that 529 plan account owners contact their plan’s 529
sponsor prior to making any withdrawals for K-12 expenses and ask if there would be
any state taxes or penalties on those distributions.