Part 1 - A Warning

What I am writing here in based upon current tax law. Some wise folks think that the Maryland government might change the law. So no guarantees that this will work.

Part 2 - Introduction

Over the years there has been a big discussion about the high cost of college. In response the government wants people to save for college. They created a tax advantage for people to put their money into special savings accounts. The money you put in is not tax deductible - but when you take it out you do not have to pay tax on the earnings and growth. Remember the government wants people to get an education and the government does not want everyone to need financial aid. Allowing people to save themselves was therefore encouraged. The money in these accounts can only be used for college. If you take the money out in a year you are not in college then you have to pay taxes and a penalty. These plans are set up by the states and now it seems every state has some form of 529 accounts.  To add an incentive many states have the following law. Money that you put into a 529 plan is tax deductible for the state income taxes. And it is this provision that allows this “loophole”

Part 3 - The New Federal Tax Law

Last week there was a major change. The federal government imposes taxes and penalties on non-qualified withdrawals. The new tax law said that money can be withdrawn for k-12th grade tuition.

You might ask the following question. Who has money to save for college? How many people really have extra funds to put into fancy funds and then discover that they need to use the money for k-12th

Are we really addressing the common man’s issues?  The answer is yes. Keep reading

Part 4 – The Plan to Save

In Maryland every parent can deduct 2500 per year per child for money put into a 529 plan. That means that both mom and dad can open accounts. Therefore, the parents can deduct 5000 per year per child for money put into a plan.  Under the new law they can withdraw these funds the next day and pay grade school tuition. The money only has to be parked in the 529 plan for one minute for this loophole to work. I call it a loophole because this might not be the intent of the law. The upshot is that parents can deduct 5000 per child per year and save the state’s tax rate of 8%. That translates into a free gift from Maryland of $ 400 per year per child. Not bad.

Part 5 - More Strategies

Money in a 529 can be moved from sibling to sibling. Imagine parents have 2 children. A 1st grader and a baby. Their tuition for the older child is more than 5000. Very simple. Put money into the baby’s 529 and then transfer to the sibling and now you have 10k. Wow! This ability to transfer was originally created to assuage the concerns of parents who were afraid to save for college in the name of child 1 in case he did not go to college. Very simple the government responded – transfer the money to child 2 who might be more inclined to attend college.  We are now using this provision in a whole new way.

Part 6 - Why the Sudden Rush

Starting in 2018 you can withdraw a max of 10,000 per child from their 529 plans to pay for k-12th.

However, you can only put INTO the fund 5k per year. Where is 10,000 supposed to come from? So here is the strategy. Put into as 529 plan now (now as in the next 3 days!) money. It must be before 2017 ends. Remember no more then 2500 in an account run by mom and 2500 for dad. This is per child. Then come next week you can take the money out tax free. The only requirement is that you use the money for grade school tuition sometime in 2018. And for your 2017 Maryland income taxes you will get a tax deduction worth 400. There is no limit as to how many children you can do this for. People have told me they are going to do this for 7 children and take a deduction for 35,000 dollars with money that they are putting in this week and removing next week. Sound amazing, no? They will save $2,800 on their state of Maryland return. Perfectly legal.

Part 7 - More Information

I strongly recommend that you read further regarding this. There is a wiki article on section 529 plans. Also, there is a great website called savingforcollege.com with a lot of information and links to every state’s plans. Also see maryland529.com. Follow that link and click on Maryland college investment plan. You can sign up online and transfer money in online. Lots of information on that site as well.  It seems that grandparents can set these up as well. I have not looked into that yet but certainly we might be “crossing state lines’ and that requires more research.

Part 8 - What is Kindergarten?

I think there is some confusion here. You see in girl’s school kindergarten is the grade before 1st grade. However, in TA and TI kindergarten is 2 years before 1st grade ad pre-1-a is in-between.  In those schools does the tax law change for TA and TI. Sorry – I don’t know but I suspect that the intent of the law is that kindergarten is the year before 1st grade. Therefore, kindergarten would be eligible in Bais Yaakov and Bnos but not in TA and TI. Gosh!

Part 9 - Conclusion

I think that in the next 3 days frum folks in Baltimore can save one million dollars by doing this. Seems like a worthwhile strategy to pursue but I hope you read the warning in part 1. And remember you cannot withdraw the funds until 2018 when the new tax law kicks in.

Eli Pollock CPA can be reached at elipollock2@yahoo.com