There are many tax reforms that have come into play in 2018 since the Tax Cut and Jobs Act of 2017 (TCJA) took effect. Perhaps a few of the most exciting are provisions regarding 529 education savings accounts (ESAs). ESAs are an essential part of the strategy many parents employ to fund their child’s college education. Except, the savings aren’t restricted to college expenses anymore! Read on for more information and to discover additional changes you should know.
Since their inception in 1966, ESAs have helpfully funded the higher education of account beneficiaries. There are many advantages these accounts present that make them attractive savings tools. Parents aren’t the only ones who can open 529 plans. They can be opened and also funded by a grandparent or an aunt, and even by the beneficiary. There are no income restrictions on owning a plan, and you can open more than one. Contributions are not tax-deductible, but income generated by the plan grows tax-free provided it is spent on qualified educational expenses.
In the past, qualified education expenses for ESAs were restricted to postsecondary educational institutions (college, university, vocational, etc.). With the potential for your child to be saddled with the astounding debt that student loans present—ESAs are a pleasant and welcome alternative for college savings. However, now the new tax provisions allow specific expenses pertaining to enrollment in elementary or secondary public schools, private and religious schools to classify as “qualified educational expenses” from 529 plans. (Find out more about qualified expenses in this IRS publication.)
Here’s what you need to know about 529 plan changes:
- You can withdraw up to $10k (tax-free) per year, per child, to cover K-12 tuition relating to enrollment and/or attendance in public, private, and religious schools.
- The annual gift tax exclusion rose from $14k to $15k for 2018, provisions continue allowing up to 5 years of contributions in a single year.
- Accounts benefitting disabled children can now be rolled into an Achieving a Better Life Experience (ABLE or 529A) account without incurring a penalty for doing so. Annual contributions to ABLE plans are $15k, but provisions have been made allowing the beneficiary to contribute an additional amount once their annual limit is reached. This amount can be up to the lesser of: the individual’s compensation for that year or the federal poverty line for one-person households. Lastly, through the year 2025, beneficiaries are permitted to claim a saver’s credit for contributions made to their accounts.
While most are happy with these provisions, there is a bit of a speed bump in the allowance of $10k tax-free distributions to cover K-12 expenses: While you won’t incur taxation or penalty at the federal level, you may at the state level depending on your state’s laws that are already in place regarding 529 distributions. At the present time, states dictate the way their 529’s are set-up and distributed, and their language is inclusive to higher education only. Learn more from this article in Forbes. But, definitely check with your financial advisor or CPA to determine how your state will handle this if you plan to take advantage of the provision for your children.
The tax law changes for 529 plans make it easier for those savings to accumulate and to be used for qualified education expenses for each beneficiary. If you own or plan to open an ESA for yourself or a loved one, you should familiarize yourself with all of the rules that govern these accounts. Doing so helps you avoid taxation, penalties, and keeps you in compliance with IRS rules and regulations.
Pantheon Wealth Planning can help you, too. Our niche is assisting people like you in developing custom wealth planning strategies based on up-to-date information—such as tax reform. Understanding changes in savings vehicles like 529 plans helps you budget adequately so your efforts allow you to realize your savings and financial goals.
Prior to investing in a 529 plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.