Written By: Dan Honsberger

One of the implications of the Tax Cuts and Jobs Act of 2017 is the additional uses of distributions from 529 plans, tax-free and penalty-free.  Beginning January 1, 2018, distributions are allowed to be used to pay for tuition to elementary and secondary schools, up to $10,000 per year, per child.

Here’s how this would work:

  • Make out-of-pocket tuition payments to an elementary or secondary public, private, or religious school.
  • Take one or more distribution from your child’s 529 account, to reimburse yourself for tuition costs.
    • Reminder – the total year’s distribution amount should be no more than the lesser of $10,000 or your out-of-pocket tuition cost.
    • And note that the $10,000 max distribution applies to each child — you could, in theory, take $40,000 of distributions tax- and penalty-free if you had 4 children, each of which had tuition costs exceeding $10,000 in a given year.
    • Distributions above the limit will be subject to the normal taxes and 10% penalty.
  • In January of the year following the distribution, your 529 plan will send a form 1099-Q.  This notifies you and the IRS that you made a distribution from the 529 plan.
  • As with a 529 plan distribution for qualified higher education expenses, it is the taxpayer’s responsibility to retain records of the corresponding education expenses.  Provide those records to your tax preparer, so they know that your distribution should not be subject to taxes or penalties.

For more information on this and other education planning topics, please reach out to your Financial Strategist.