The New and Improved 529 Plan

The New and Improved 529 Plan

By |2018-08-14T17:16:27+00:00July 19th, 2018|Financial Planning|

When the Tax Cuts and Jobs Act became law in 2017 it contained provisions that lowered tax rates on both corporations and individuals. But tucked away in the recesses of all the legislative lingo was a benefit for parents that has been largely overlooked. The tax bill expanded the flexibility of 529 educational savings plans.

529 plans are named after the section of the IRS code that outlines the rules of the plan. The 529 has traditionally been used to save for a child’s college education. Plans are operated by a state or an educational institution. They provide investment options, usually mutual funds, and you choose how you want your contributions invested.

There are two main advantages to 529 savings plans. The money invested grows tax-free. Then, when the money is withdrawn for qualified higher education expenses, such as tuition, room and board, and computer software and equipment, the withdrawals are tax-free—a pretty good deal.

But because of the Tax Cuts and Jobs Act, parents can now withdraw up to $10,000 a year from 529 plans to pay for K-12 tuition at public, private, and religious schools. The provision does not apply to homeschooling.

Until now, the only way parents could have tax-advantaged savings for K-12 was through a Coverdell Education Savings account. With the new changes, parents can rollover a Coverdell account into a 529 account without tax consequences.

There are contribution limits to a 529 plan. An individual can contribute $14,000 per year, and couples can give $28,000. You can also pre-fund 529s. An individual can deposit $70,000 in a single year, and couples $140,000. But no more contributions are allowed for 5 years. In addition, there may be tax advantages to you. More than 60% of states offer a full or partial income tax deduction for contributions to a 529 plan.

With a 529 plan, you are always in control. The account belongs to you. Your child is the beneficiary. You make the decisions about when distributions are made and how much. If there’s money left when your child finishes school, you can reclaim the remaining money, although you will pay income taxes on the earnings portion of the funds, plus an additional 10 percent IRS penalty, because the funds were not used for their original purpose. There is an exception if you withdraw funds because of death, disability, or if your child receives a scholarship and doesn’t need the funds for college expenses.

But you don’t have to withdraw unused money. You can change the beneficiary of a 529 to one of your other children, or a grandchild, or even yourself, if you intend to go back to school.

The Tax Cuts and Jobs Act also allows existing 529 plans to be rolled into 529 ABLE accounts. Money can be withdrawn tax-free when the funds are used to pay for qualified disability expenses, such as education, job training and support, healthcare, and financial management. To qualify for a 529 ABLE account, a person must have been diagnosed with a significant disability before they turned 26 years old, with a condition expected to last at least 12 consecutive months. The individual must be receiving benefits under SSI and/or SSDI, or be able to obtain a disability certification from a doctor. However, if the value of that person’s 529 account exceeds $100,000, they will no longer be eligible for SSI benefits.

529 savings plans. They’re not just for college anymore.

If you would like help with a 529 savings plan, let us know. Contact us at info@alhambrapartners.com.