One of the better, but lesser known, provisions in the federal tax labyrinth is the 529 education savings plan. Instituted in 1996 and named after Section 529 of the Internal Revenue Code, the federal 529 savings program was designed to help families set aside funds for future college costs. The program is operated by a state or educational institution.
The mechanics of the 529 plans are similar to a 401K or an IRA. Regular contributions are made to mutual funds or similar investments. Plans typically offer a number of options. Based upon the performance of the options selected, the value of any particular plan may rise or fall.
In most cases, annual contributions to a 529 are tax free up to $14,000, at which point they can be hit with the gift tax. Limits for the whole extent of the term are set by individual states, but are at least $300,000. The program’s liquidity allows plan owners to withdraw their funds at any time for any reason. In a recent report from the College Savings Plan Network, the average nest egg in a 529 account was $21,383.
Now, thanks to the 2017 Tax Cut and Jobs Act signed into law in late December 2017, parents of students in Catholic and other private schools from grades K-12 are able to withdraw up to $10,000 annually – and tax-free – from their 529 account for pre-college education.
Opponents of amending the 529 program tuition to include K-12 deride it as benefiting only the rich. In actuality, the legislation could not be more blue collar-serving. Middle class parents working multiple jobs are those most attuned to providing the best college education for their children, and so are also looking to provide the best college preparation possible. A Catholic high school education purchased on a 529 plan can be an investment multiplier: last year the average Kennedy Catholic student was awarded $280,000 in college scholarship monies, on a 4-year high school tuition of $40,000.
That’s the good news, and it is significant. The bad news is that, upon analysis by the New York State Catholic Conference and other partners, families in New York are unable to take full advantage of the reform.
The rub is that most states, including New York, go above and beyond the federal government by allowing a family’s contribution to their 529 account to be tax deductible. But a deeper examination of New York’s laws has led experts to believe that monies withdrawn from a 529 plan for K-12 tuition will be subject to state income tax. Not only will families be taxed on any 529 earnings they might have made, they may be obligated to pay back the amount that was deducted from their state income taxes in the first place. Such a move would likely offset any federal tax advantage a family had accrued.
Smart savers and investors have always been attracted to 529 plans because earnings in the program grow free of taxes and will not be taxed when the money is taken out to pay for school. Slanting this tuition savings plan towards colleges picks the pockets of the 10 percent of the population whose children do not attend public schools.
The budget for New York State has not yet been set in stone, so there is still time for the legislators to fall into line behind the majority of the other states. The New York State Catholic Conference is calling upon all affected families to urge Albany to provide the same, full tax benefits of 529 accounts for K-12 tuition that are available to New York’s families for college tuition.