Saving for Educational Expenses

The month of January brings a new year and a new school semester. For some parents, a new school semester means tuition bills may soon be arriving, if they haven’t already. Luckily for parents sending their children to private school for grades K-12, Congress may have brought some potential relief to saving for the educational expenses. This month’s letter provides details on this potential relief and updates to a previous newsletter. On November 2, 2017, U.S. Congress passed the Tax Cuts and Jobs Act of 2017. One of the items featured in this act was to extend the use of 529 plans to qualified expenses for students in grades K-12. Before this Act was passed, 529 plans could only be used towards higher education expenses such as college, trade schools and post-graduate education. Fortunately, 529 account owners can now use the proceeds from their 529 accounts for tuition and other school expenses for students in grades K-12. Unfortunately, because an Act goes into effect at the Federal level, does not mean each individual state is ready to enact it at the state level. But, luckily for Louisiana residents, the state legislature has approved the new tax laws and have extended the potential benefits to Louisiana 529 owners to now use their 529 plans for K-12 educational expenses. As we previously wrote about, Savings for College, 529 plans can very useful savings accounts for potential educational expenses. In case you are unaware of how 529 plans work, allow us to briefly explain. A potential owner of a 529 plan would open the account for the beneficiary, fund it periodically, and let the funds grow via their investment choices offered in that respective plan. The benefit of these accounts is that the funds accumulate tax free (if the funds are used towards educational expenses). Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Withdrawals are also exempt from state income tax for qualified higher education expenses, as well. Contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the money usually can be used at all accredited post-secondary schools in the United States. For a more detailed explanation of 529 plans, please visit our article linked above. In addition, Louisiana residents also have access to one of the best state-provided 529 accounts in the country, known as START (Student Tuition Assistance and Revenue Trust), which is administered by the State of Louisiana. Louisiana START accounts have a number of funds that offer good and basic investment choices, that have low operating expenses. Additionally, the state does not charge any fees or commissions for administering the account. Louisiana offering this plan for free is a major benefit to potential enrollees. Additionally, the state of Louisiana contributes an “earnings enhancement” that varies from 2% to 14% of contributions made to the account, which is based on the account owner’s adjusted gross income. In addition, up to $2,400 ($4,800 per couple) per beneficiary is deductible from Louisiana state income tax in most cases. Please consult your tax preparer for more specific tax details. Previously, the START plan could only be used for secondary education, but given the new act in place the plan is now being extended to support educational expenses for grades K-12. As with all 529 plans, Louisiana’s START program provides a tax-efficient method to save for education and the funds within the 529 plans ARE NOT LIMITED to Louisiana schools. As we stated above, 529 plans can very powerful tools for parents to help save for educational expenses. Please let us know if you have any further questions concerning the topic.