The Tax Cuts and Jobs Act of 2017 (TCJA) expanded what a 529 plan can be used for. TCJA allows that distributions from a 529 plan for no more than $10,000 per designated beneficiary per year can be made for enrollment in public, private or religious elementary or secondary schools.
While this is a significant change, does it make sense? The power of investments, including 529 plans, is in their compounding over time. In theory, the longer an investment is allowed to grow, the more it is worth. This is especially true with an investment like a 529 plan that grows tax-free and qualified distributions which are also tax-free. Furthermore, gift tax law allows that a payment for tuition and other qualifying costs can be made directly for elementary, secondary or college education gifts tax-free.
529 plans are part of a taxpayer’s (often grandparents) gift and estate tax plan. The goal of using the plan is to reduce the eventual estate tax. While TCJA increased the gift and estate tax exemption to over $22 million, some states, including Massachusetts, still have much lower exemptions.
So why use a 529 plan that can grow tax-free for elementary or secondary education when it can be paid for using the grandparents’ funds and possibly reduce their eventual estate? In most situations, the answer is that it does not make sense. There is no one-size-fits-all gift and estate tax plan that is appropriate in all situations. If you are contemplating a 529 plan, be sure to consult with a qualified tax and financial advisor for assistance with your specific situation.
As always, we at Gray, Gray & Gray and Gray Equity Management are ready to assist you with your gift and estate tax planning needs, including education cost planning. Contact us at (781) 407-0300 with any questions.