Louisiana and Kentucky are the first states to offer 529 plan investment options specifically designed to help families save and pay for K-12 tuition. Louisiana launched the START K12 Program, a separate 529 plan for K-12, and Kentucky will offer new investment options based on college or K-12 enrollment dates.
Louisiana’s START K12 Program
The START K12 Program works much like the START Saving Program, Louisiana’s 529 plan for college savings. Investments in the account grow tax-deferred and qualified distributions avoid state and federal income taxes. The earnings portion of a non-qualified distribution incur income tax and a 10% penalty, except if the beneficiary dies, becomes disabled or receives a scholarship. Investments are managed by the Vanguard Group. Either the 529 plan account owner or the beneficiary must be a Louisiana resident.
However, there are a few key differences between the START K12 Program and the START Saving Program:
- With the START K12 Program, qualified distributions are limited to $10,000 in K-12 tuition expenses per beneficiary per year.
- Louisiana taxpayers are eligible for a state income tax deduction of up to $2,400 ($4,800 if married filing jointly) for contributions to the START Saving Program, but not for contributions to the START K12 Program.
- Account owners can transfer funds from another state’s 529 plan to their START K12 Program once every 12 months. But, funds may not be rolled over from a START Saving Program to a START K12 Program. Any funds remaining in a START K12 Program when the beneficiary finishes high school can be rolled into a START Saving Program to pay for college.
- Unlike a traditional 529 plan, the START K12 Program is considered abandoned if the account owner does not express interest in the funds at any time during the five-year period following the beneficiary’s 20th birthday. If an account is abandoned, it is terminated and the funds are turned over to the Louisiana State Treasurer and held in trust pending a claim.
- The maximum total account value for the START K12 is $180,000 and the maximum total account value for the START Saving Program is $500,000.
Keeping K-12 savings in a separate 529 plan from college savings can help families track their progress toward each goal and make different investment choices for each goal. Private K-12 schools may also be more likely to ignore funds held in a separate 529 plan for college when determining a student’s eligibility for need-based financial aid.
Kentucky’s new enrollment-based 529 plan investment options
Effective February 25, 2019, the Kentucky Education Savings Plan Trust (KESPT) will transition its program manager from TIAA-CREF Tuition Financing, Inc. to Ascensus College Savings. As part of the change, KESPT will feature new enrollment-based investment offerings that will better accommodate families who are saving for K-12.
Like many other 529 plans, the KESPT 529 plan currently offers age-based asset allocations. Age-based asset allocations typically start out heavily-weighted toward stocks and shift toward more conservative fixed income investments over the life of the account. However, these allocations are based on projected college entrance years, and don’t work as well for families saving for K-12, who have less time to absorb the risk associated with investing in stocks.
According to David Lawhorn, program manager for KESPT, Kentucky’s new enrollment-based asset allocations will provide greater flexibility than their current age-based investment offerings. Instead of selecting an investment portfolio based on the beneficiary’s age, you choose your investment option based on the year you will begin drawing down funds in the account, whether you are paying for college or K-12. This is similar to target-date portfolios for retirement savings.
“If your goal was to save for a couple years to save for your kindergarten tuition, that would be an enrollment period with a 2-year horizon”, he says. “If your goal is to save for college that enrollment horizon would be 18 years for a newborn.”
Families who are currently using the KESPT 529 plan to save for K-12 tuition may want to consider making an investment change to an enrollment-based portfolio once the transition to Ascensus takes effect. The KESPT 529 plan is available nationwide, so investors saving for K-12 in another state’s plan can also take advantage of Kentucky’s new enrollment-based asset allocation. For example, if your state offers an income tax deduction for 529 plan contributions to their 529 plan, but only when the funds are used to pay for college, it may make sense to explore another state’s investment offerings for your K-12 savings. 529 plan account owners can make investment changes twice per year and are allowed one rollover during a 12-month period.