By Maureen Smith
JACKSON – Mississippi parents can use one of the state’s 529 plans to pay for Catholic elementary and high school educations and take advantage of the federal and state tax benefits of the plans. The provision is part of the new tax plan approved by Congress and signed by President Donald Trump in late December.
Emelia Nordan, the college savings and policy director for the Mississippi State Treasurer’s office led a webinar for the Mississippi Independent School Association about the topic on Tuesday, Jan. 30. She explained that Mississippi’s MACS 529 savings account can now be used to pay for private or Catholic School tuition, but urged parents to be cautious and seek advice from a financial planner as they move forward. The MPACT pre-paid college tuition plan is not part of this new provision.
“Last year Congress expanded the definition to include tuition for elementary and secondary education,” said Nordan. Interest earned on deposits is not taxed on a federal level and in Mississippi, “you can contribute $10,000 in a single account, $20,000 in a joint account per year and claim that contribution as a state deduction,” said Nordan. Parents can contribute more than $10,000 per year per child, but that is the only tax deduction they can take. Parents can contribute to an account all the way up to April and claim the deduction on their 2017 taxes.
The deduction only applies if the family is using the Mississippi 529. Out- of-state 529 plans can provide some federal benefits, but only a state plan will result in state tax deductions.
Mississippi’s 529 savings plan has ten different investment options so families can select the one they think will earn them the best return. Another route is to simply deposit the money for the ten-day required waiting period and immediately withdraw it just for the tax benefit.
The families would still have to pay any fees associated with the plan, said John Fletcher, a partner at Jones Walker LLC working with the Tax and Estates Practice Group. He said families should take a good look at whether the tax benefit would offset any fees, but he recommends that families consider finding some way to start saving money.
“What I would ask people is if they are considering opening a 529, can they put $250 in it, maybe more?” If the family is already making tuition payments, Fletcher said they can make the payments into the 529, then get the money back out after the required 10-day waiting period. “Then, if you earn any interest, you keep that money and your cash flow stays the same,” he said. Getting some of the tax benefit is just another bonus if a family uses the plan this way.
In order to access the money, parents can use an online account to have the money transferred directly to their school or ask for a check. Nordan warned that having their student’s identification number or name on withdrawals is important so schools will know how to apply the money. She also said documenting how the money is used is critical.
One unanswered question deals with third-party institutions who process tuition payments. For example, some schools have a partnership with a local bank. Parents can take out a loan for their tuition. The school gets the tuition money up front while parents are able to make year-round payments to the bank. Nordan said it is unclear right now how the IRS will view payments to third-party vendors. “You are self-certifying that this is a qualified expense,” said Nordan. This is part of why documentation of how the money is used can be important.
Fletcher said it might be better to withdraw the money as a loan reimbursement rather than have the 529 pay the bank, but he added that the Internal Revenue Service has not yet clarified this part of the plan.
Another unclear area is whether the money can be used for pre-kindergarten programs. In the case of colleges and universities, the accreditation of the institution is what determines if it is eligible for money. The initial bill references K-12 education, so pre-kindergarten families may want to wait until the IRS weighs in on that issue.
The changes are getting attention on a national level. Representatives from the U.S. Conference of Catholic Bishops and the National Catholic Educational Association spoke with Catholic News Service about the need to educate the Catholic School community about the new options. One significant change the national representatives are discussing is the definition of who may contribute to such a plan. Under the original 529 framework, it was parents. Now, it could be pretty much anyone.
“Grandma and Grandpa, aunts and uncles, and parishioners” could make contributions under an expanded 529 rubric, Daniels noted. No matter who contributes, only the account holder gets the tax benefit in Mississippi.
“I was the principal of a grade school, and I know there are parishioners who really want to make a difference in children’s lives,” said Dominican Sister John Mary Fleming, executive director of Catholic education for the USCCB.
Under the new law, not only can multiple people contribute to an account, multiple accounts can be opened for the same child, according to Kathryn Flynn, content director of savingforcollege.com, which provides research on 529 plans’ performance rankings and other metrics, then recasts it to make it more understandable.
Non-profit organizations can even open an account to earn interest for scholarships. The non-profit would not have to designate a recipient until the scholarship is awarded.
By Maureen Smith