The GOP tax plan, released Thursday, would take the long-overdue step of allowing parents to use elementary and secondary education expenses under 529 savings plans. This could help parents across the country access more education options for their children.
The plan would effectively eliminate the existing Coverdell savings account program (which allows families to save for their children’s K-12 expenses) by enabling families to put post-tax earnings into an account, with any interest that accrues growing tax-free if put toward K-12 expenses.
The tax plan would replace the Coverdell system of K-12 savings, which was limited in scope at just $2,000 annually, and would combine it with the current 529 college savings plan, providing a much more robust K-12 savings vehicle for families.
As the tax plan reads:
Under the provision, new contributions to Coverdell education savings accounts after 2017 (except rollover contributions) would be prohibited, but tax-free rollovers from Coverdell accounts into section 529 plans would be allowed. Elementary and high school expenses of up to $10,000 per year would be qualified expenses for section 529 plans.
Families could also leverage their 529 savings to pay for expenses associated with apprenticeship programs.
As The Heritage Foundation has previously written, allowing K-12 expenses to be 529-eligible is smart policy. In a 2012 report, we explain:
Existing ‘529’ college savings accounts should be expanded to allow families to save for K-12 education expenses. … [This]would allow parents to use more of their money for a child’s private school tuition or other education expenses. Since most states offer either tax credits or deductions to encourage saving in a 529 plan, expanding it to make K-12 expenses allowable would effectively create opportunities for millions of American families to open [education savings accounts].
We also explain how 529 accounts have become extremely popular among families. Investments in the accounts have increased significantly in recent years.
In 2000, there were $2.6 billion in total investments in 529 plans. By 2006, that figure had increased to $92 billion, and by 2011 it had reached $135 billion.
The biggest advantage to investing in a 529 plan is that withdrawals from the accounts are free from any federal income tax. Funds spent from 529s are tax-free, as long as disbursements are used to cover qualified educational expenses.
Moreover, of the 44 states that levy an income tax on earnings, 35 states offer credits or deductions for contributions to 529.
Expanding section 529 of the Internal Revenue Code to allow families to contribute money to 529 plans for K-12 educational expenses would enable families to save for K-12 education-related expenses while increasing their ability to pay for education options outside the public school system.