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New Tax Law Update: 529 Plan Expansion

several people have tweeted me the same

thing Judy did earlier this week at Dave

Ramsey calm is the Twitter account by

the way or at Dave Ramsey rather can you

discuss the 529 expansion to cover K

through 12 to ition now your 529 savings

plan is an after-tax dollar you already

pay taxes on it like a Roth is that goes

into an account and it grows tax-free

for college until the new tax law kicks

in and the new tax law now says it grows

tax-free for college or K through 12

which is pretty neat if you wanted to

pull it out to pay for private school in

other words you can so the school choice

advocates are going bananas and saying

this is a big victory and so forth but

basically that's what it comes down to

is that and the other thing that's going

to allow you to do is roll an ESA to a

529 and I guess vice versa I'm not sure

but you rolled your si you know if I've

29 should you want to there's really no

advantage to that here's the thing on

the K through 12 it's a nice thing

okay it's a nice feature and the

tax-free growth is in there let's say

you put in ten thousand dollars and it

grows 20 percent that's $2,000 no taxes

on the $2,000 growth taxes on the $2,000

growth in the twenty five percent tax

brackets five hundred bucks okay so if

you're saving for kindergarten through

sixth grade the amount that's in your

account that is growth is very small and

the amount of tax savings is very small

so the mathematical facts are you know

maybe for senior high school maybe high

school private high school it might you

know it might actually work out to

bother and do this with a 529 but I mean

if you got a five year old and you're

gonna throw money in a 529 to send them

to private school next year it does

absolutely no good because only the

growth is grow

tax-free I mean only the growth is

tax-free you didn't save any money by

putting money in there it's only the

growth and it's it's a and the growth

only matters over a long period of time

so when you're saving for a brand new

baby for college you got 18 years of

growth that's tax-free now we're talking

about some money I mean you might have

ninety a hundred thousand dollars for

the growth and so you might save thirty

thousand dollars on taxes using a 529

and so we do recommend the right kinds

of 529s and/or ESA s or those kinds of

things educational savings account works

the same way but if you're saving it for

three years it's not gonna be enough

growth to have enough tax savings to

even it's not it doesn't matter much so

it's more something like a lot of stuff

out of Washington it's more about the

chest-beating that it is the

mathematical facts that change your life

it doesn't change your life I mean

there's gonna be some instances where

somebody you know starts when a child is

born and they just load 529s up to the

gills and then they pay for private

school and college tuition out of 529s

and they're actually going to save a

little tax money but the number of

people that don't save for college

period is so high that if we deflect

what should have been college savings to

pay for K through 12 this was a dumb

plan your first goal needs to make sure

your college is funded before you start

worry about private school paying for

that tax-free for two reasons one is

mathematically it doesn't matter and

where you went to your K through 12 as

long as it was safe and you didn't get

shot in the process right as long as

that kind of stuff and where you went to

school there's almost no data that shows

that you're successful because you went

to a private you know K through six

versus a public K through sixth a good

public K through six something safe and

the teachers don't mail it in and that

kind of stuff I mean sometimes you got

trashy school system I get that but

anyway I so just be careful and you

don't let this

tax law redirect your brain because it's

not going to save you much tax money to

run your K through 12 through your 529

and if it causes you to use that money

for that instead of and then they don't

have money for college you screwed up so

your 529 for college is first for two

reasons I hope that makes sense to you

so that's a good question though I'm

glad it came up and the big thing that

happened here the reason I say it's just

just you know chest beating is it's all

of this school choice argument the

political argument on that and you know

you should be able to do it with your

money what you want to do with it I

completely agree with all of that but

mathematically does this change

directions for you it doesn't move the

needle regardless of your politics it's

really not going to change 99 percent of

people that go to private schools life

the number of dollars actually saved

here is a very minimal versus saving 18

years for college you might really save

30 or 40 grand in taxes by using a 529

you're not going to save that much on K

through 12 number one you're not gonna

pay as much probably and number two you

got a fun college first so you gotta

have a lot of money start funding both

of these and I honestly would keep a

separate 529 if you're going to do K

through 12 keep it separate from your

529 for college don't don't mix them and

that way you don't accidentally spend

your college money so your kid can go to

the high school with their little

friends you know which is how people

make decisions on this stupid stuff too

often all our friends go there and all

the sudden you're broke so you just

really have to think you have to think