Since the new tax reform bill, saving in a 529 Education Plan looks a lot more attractive.
Marissa Van Diest, a financial adviser at Carlson Financial, explained to News 3 how changes to the new tax bill influence what someone saves in the plan.
Prior to the new tax bill, many were able to deduct what they paid for state and local taxes from their federal taxable income by itemizing. Now that ability to deduct state taxes may go away or be limited, leaving people to look for other options to save on their taxes, Diest said.
529 contributions are not tax deductible at the federal level, but many states allow for contributions to be deductible at the state level. In the state of Virginia, you can deduct up to $4,000 of contributions per account, or an unlimited amount if you are over 70 years old.
The growth of the account is tax-deferred and withdrawals, when made for qualified education expenses, are tax-free, Diest said.
Qualified expenses are accounts that have always been tax-free when used for qualified college expenses, like tuition, room and board, books and other necessities.
Now, you can also use them to pay for up to $10,000 per year of K-12 expenses. Diest said this might really help parents or grandparents who are already paying for private school tuition.
Diest said the best ways in the past to set up 529 accounts have had high fees and poor investments options. Some discount custodians offer really good rates, like a quarter of a percent at Charles Schwab, and low-cost index funds like Vanguard.