4. Account Management
Given the relatively short time horizon, those putting new funds into a 529 earmarked for K-12 spending should be mindful of how to invest those funds. The more aggressive the account is invested, the less time to make up for potential losses. Conservative investments still have a tax benefit, but the compounded benefit is less meaningful.
If you have your 529 plan set up in the autopilot “aged-based” investment option (which gets more conservative the closer to college) it may misalign how to invest your college and/or K-12 funds. This means you might have to manually select multiple investments for your 529 to segment off the college funds from the K-12 funds. Another option is to set up a separate 529 for K-12 expenses. You can combine the account later on if K-12 funds remain as long as the owner and beneficiary are the same.
5. Converting Your ESA Into A 529 Account
Those wanting to streamline their educational savings funding may consider combining their existing ESA with a 529 account since the new law makes 529 plans competitive with Coverdell Education Savings Accounts (ESAs). The allure of ESAs is that they always allowed withdrawals for K-12 expenses. However, ESAs are more limited than 529s in that ESA owners could only put in $2,000 per year per beneficiary. Furthermore, those households with income over $220,000 per year are completely phased out for making contributions. Lastly, ESA contributions must be made before the beneficiary reaches 18 and used by age 30.
To summarize, there are several factors to consider when determining whether or not you should advise a client to start utilizing an existing 529 or a new 529 plan to fund K-12 expenses. Like all good financial planning, it depends on a client’s particular circumstances and should be viewed as part of an overall educational spending plan geared towards meeting your client’s desired goals and objectives.
Steven M. Sheldon, CFA, CFP, is a principal with SMS Capital Management LLC in Houston, Texas.