Broker Check

529 Plan Distributions

February 21, 2019

The Tax Cuts and Jobs Act of 2017 expanded the definition of “qualified higher education expenses.” In the past this definition required enrollment in a qualified post-secondary educational program that qualifies for federal financial aid. The new law expands the definition to include $10,000 in annual expenses for tuition in connection with enrollment in elementary or secondary school.

While this change may seem like a big benefit to 529 owners, keep in mind that the main benefit of a 529 Plan is tax-deferred growth and tax-free distributions when the money is used for qualified educational expenses. 

By expanding the definition for tuition expenses to a younger age, the owners may be giving up the potential for a longer time horizon for growth. Therefore, the potential benefit of tax-free growth may be reduced.  In addition, the shorter time horizon may cause the investment objectives to change if the money is used to pay for elementary or secondary school.

Lastly, some states do not conform to the new Federal law. Therefore distributions for elementary or secondary school may be subject to state income taxes and penalties if they’re considered “non-qualified” under state law.