Much has yet to be learned about the practical effects of a new federal tax overhaul after its December passage by congressional Republicans.
But tucked away in myriad provisions of the newly signed “Tax Cuts and Jobs Act” is a fundamental shift in scope for Utah’s 529 plans, a popular program that encourages residents to save for college through state-sponsored, tax-free investment accounts.
“For one thing, we have to revisit our tagline,” said Lynne Ward, executive director of Utah Educational Savings Plan, or UESP.
Ward said UESP’s slogan of “Save for college. Inspire their future” no longer captures the full breadth of 529 plans. What were traditionally long-term savings accounts for higher education can now, under the new tax law, be used as a current expense account for private- and religious-school tuition in kindergarten through grade 12.
“This is a whole new field,” Ward said. “It’s a whole new population that we would service.”
There’s no reason to expect that traditional account holders would be harmed by the expansion of 529 plans to include private K-12 tuition, Ward said. In fact, she said some tangential benefits could result from broadening UESP’s portfolio and bringing in additional accounts.
“As we get bigger and bigger, we’re able to lower our fees,” she said, “which helps everybody.”
But many observers see the change as one of the GOP tax plan’s many giveaways to the wealthy, this one allowing them to now set aside large sums of money in tax-advantaged 529 accounts for use in making annual private school tuition payments.
Chase Thomas, policy and advocacy counsel for the left-leaning Alliance for a Better Utah, said the group does not have a position on the 529 changes. But in the wider context of the GOP tax bill, Thomas said, changes to college-savings plans contribute to perceptions the law tilts in favor of affluent Americans.
“The majority of children who attend private schools come from wealthy families,” Thomas said. “It’s really only those families that are already doing well, financially, that would be able to afford saving for expensive private school tuition in advance.”
UESP currently manages roughly 355,000 individual accounts, Ward said, totaling $11.9 billion in combined assets. Investment earnings from those accounts are not taxed, and the plans have enjoyed annual gains of between 2 percent or more than 10 percent, depending on an individual account owner’s assets and investment preferences.
“We don’t guarantee any earnings,” Ward said, “but we do try to offer investments that will allow for earnings and dividends and interest.”
Traditionally, parents open a 529 plan for their children and make regular contributions in anticipation of the money being used for future college and university expenses. Once enrolled in higher education, the student can withdraw funds — again, with no tax penalty — for a range of academic expenses such as tuition, fees, textbooks, room and board, or supplies.
Account holders are not required to submit spending invoices to UESP, Ward said, but instead are held to an honor system of appropriate expenditures — with the potential of an audit if improper withdrawals come to light.
”The IRS and, in the state of Utah, the Utah State Tax Commission are fully authorized to audit those expenses,” Ward said.
Under the new tax law, account holders can withdraw up to $10,000 each year for K-12 tuition at private and parochial schools. The changes are limited to tuition at the elementary and secondary level, in contrast to higher education spending, when the accounts can be used for academic expenses.
The $10,000-per-year limit is insufficient to cover tuition at most private schools, meaning parents will likely need to pay additional funds out of pocket to enroll their children. But for families who are already paying annually for private-school tuition, the change creates the potential for significant tax breaks.
In a column for The New York Times last week, personal-finance writer Ron Lieber referred to an analysis by the investment group Vanguard to describe how a wealthy family could “superfund” their child’s education, depositing $200,000 into a 529 plan upfront and not touching the account beyond withdrawing the annual $10,000 allowance for private school tuition.
With annual interest gains of 6 percent, Lieber wrote, the hypothetical account would hold more than $370,000 when the child reaches college, which could then be drained for university expenses in a scenario saving parents tens of thousands of dollars in avoided taxes.
“If you have anything to do with running a private school, you’re probably licking your chops at this point,” Lieber wrote. “Heck, why not raise tuition by $2,380 right away!”
Todd Winters, admissions director at Waterford School, a private school in Sandy, said the changes to 529 plans are unlikely to boost enrollment. But for those families with students already enrolled, he said, it offers the potential of some financial relief.
“You’re going to be looking at families who are in the highest tax brackets who are going to get the tax benefit,” Winters said. “Over a K-12 education, it saves the family about $30,000 in taxes for that one child.”
Tuition at Waterford ranges from roughly $17,000 in kindergarten to $23,000 in grade 12. But of the school’s 920 students, Winters said 150 receive some level of financial aid.
Middle- and low-income families may not be able to front-load a 529 plan for annual tuition payments, Winters said. But if wealthy parents are better able to manage their educational costs under the new law, he said, then private schools will have more ability to offer scholarships to lower-income earners.
“This certainly could prove to be a win-win,“ Winters said. “If, ultimately, it helps independent schools remain vibrant and sustainable, those schools can then assist families that have economic need through the awarding of institutional aid.”
Ward, with UESP, said attempts to front-load a 529 plan with large sums could run into limits on monetary gifts, resulting in tax penalties. But she added that married couples and extended family members — grandparents, for example — are able to give additional tax-free gifts, offering ways to skirt those limits and still make possible a large, initial investment in a student’s account.
But she disagreed with the notion that the tax plan’s 529 changes benefit only wealthy families. While less common, middle- and lower-income parents do send their children to private schools, she said, and those annual tuition payments can make saving for college challenging.
Those parents, she said, now have greater flexibility in how they use their 529 funds while still participating in tax-advantaged savings. And the new law, Ward said, does nothing to inhibit traditional use of 529 plans as an 18-year college savings account.