![]() (Note that it doesn’t account for interest income pushing the family into the next tax bracket.)įamily A is in the 24 percent marginal tax bracket, but Family B is in the 35 percent marginal tax bracket. Let’s look at another simplified example. This means families in lower tax brackets will receive less in total federal income tax benefits than families in higher tax brackets. Capital gains from stocks and mutual funds are taxed at a lower rate, and may not be taxed at all for lower-income families. Certain interest income and dividends are taxed at your ordinary marginal tax rate. But you avoid paying federal income taxes on the growth, as long as you use the money for qualified expenses.Įxactly how much the federal benefits will affect your family’s bottom line will vary. You don’t get a federal income tax benefit for contributing to a 529, since you contribute money after you’ve already paid federal income taxes. So regardless of your state’s rules and regulations, you can get the federal tax benefit when you use this account for qualifying K–12 expenses. Remember that the 529 plan is primarily driven by the federal government. But before you rush to open one, make sure you understand all the ins and outs of how the 529 and its recent changes work. That’s a difference of nearly $50,000!įor parents who already are planning and able to save for their child’s future private school education, this makes 529s a powerful tool. If you’d saved the money in a taxable account instead, you’d only have $213,071. With an 8 percent average return on investment, and not accounting for any potential state tax payments or benefits, you’d end up with the following results, according to this calculator:īy age 14, your child would have $261,521 available in a 529. Then you invest $10,000 per year for 14 years, until she’s ready to start attending a private high school. You start with $0 invested in a 529 when your child is born. Let’s say you pay a 32 percent marginal tax rate. Not sure exactly what it looks like? Here’s an example: Why 529s are Powerful: An Example ![]() When you don’t pay income taxes on growth, your account compounds more quickly and gives you more money to work with when it’s time to pay for private K–12 education or college. When used properly, the tax benefits on your 529 can be a powerful way to help save for your child’s education. That’s why it’s important to follow the rules when using 529 funds. If you use the money for a non-qualified expense, then you’ll have to pay taxes plus a 10 percent penalty on any earnings-not original contributions-you withdraw. The key, though, is that the money must be used for the beneficiary’s benefit, and it must be used for qualified educational expenses. Contributions and growth may also carry state tax benefits, which we’ll discuss below. This means the money is to be used for the child’s education, but the parent or other account custodian actually controls the funds.Īs long as the money is used for the beneficiary’s allowable educational expenses-including up to $10,000 per year in private K–12 tuition expenses or college-related tuition, fees and other expenses-it grows federal income tax-free. ![]() But the most common use is for parents or other relatives to open a 529 account with a child as the beneficiary. Adults can even use them to save for continuing educational expenses. 529 Plan BasicsĪnyone can open a 529 plan with anyone else as a beneficiary. However, tax laws like this one are extremely complex, so be sure you understand all the implications of using a 529 plan for K–12 expenses before you go this route. This could be helpful for some parents who want to send their children to private elementary or secondary schools. Parents could get federal income tax benefits as long as they used the money for certain qualified educational expenses-all at the postsecondary level.īut the Tax Cuts and Jobs Act, passed in 2017, expanded the allowable uses of these accounts to include up to $10,000 in annual private K–12 tuition expenses, as well. These plans, created as part of the Small Business Job Protection Act in 1996, were originally meant to give parents a tax-advantaged way to save for college expenses. If you’ve done much research into how to save for your child’s college education, you’ve probably heard of 529 plans.
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