By Ryan Ellis
On Friday night, the United States Senate passed their version of the Tax Cuts and Jobs Act, better known as tax reform. Only one additive floor amendment made it into the bill.
Senator Ted Cruz (R-Texas) offered an amendment to make 529 education savings accounts even more useful than today. 529 accounts up until now have been used exclusively for college tuition and expenses. The Cruz amendment expands the use of 529 dollars for two additional purposes–tuition for students in K-12 private and parochial schools, and costs related to homeschooling a child. Up to $10,000 per year per child can be distributed for these purposes.
In a dramatic turn, the Cruz amendment was stuck at 50-50, requiring Vice President Mike Pence to hurry to the chamber and break the tie.
529 plans can be thought of as the rough equivalent of Roth IRAs for education–money goes in after tax, but then grows tax free. Distributions are tax exempt if used for qualified education expenses. If you participate in your home state’s 529 plan (these accounts are mostly run by state agencies), you may be eligible for a state tax deduction.
If the Cruz amendment makes its way into the final bill (and there is nearly identical language in the House version, so there is a good shot of this), the game will have changed on school choice. Parents can start saving right away for private or parochial school, or for homeschooling expenses, in a 529 plan when a child is born. That money can grow tax-free for years to pay for things like Montessori school, Catholic high school, or home schooling networks. With a tax deductible component in most states, parents will get an immediate tax benefit, and then further tax relief in the form of tax-free growth.
Consider the case of a parent who saves $4000 per year in a 529 for a child’s education in my home state of Virginia. He also deposits the $230 of annual tax savings he gets from Virginia into the account as a supplemental contribution. Our taxpayer sends his child to a Catholic school which charges $6500 per year in tuition, and then a Catholic high school which charges $10,000 per year in tuition.
Throughout the course of the child’s pre-college educational life, our taxpayer has saved $76,000 in original contributions to the 529 but had enough money in the account to spend just under $100,000 on tuition, assuming a 5 percent annual investment growth rate. Nearly $25,000 was therefore totally free, totally tax-exempt education funding. His 529 subsidized one-quarter of his daughter’s tuition bill, a bill he would have paid entirely with after-tax dollars without the Cruz amendment.
|529 Annual Savings Out of Pocket||$76,000|
|Reinvested Annual State Tax Benefit||$4370|
|Growth in the Account (5% avg)||$19,630|
|Total 529 Assets||$100,000|
The best sign this is smart policy is that the Left is going completely apoplectic. They hate the idea that parents can free themselves from the big teachers’ unions, and have vowed to kill not only the Cruz amendment, but 529s in general. Longtime readers might recall the Left made a run at that several years ago, and failed spectacularly.
Senator Ted Cruz deserves a lot of credit for taking this on. Thanks to him, it will become a lot easier for parents and their kids to have more options when it comes to education.
Read more here.