By Brendan J. King
When the new Tax Cut and Jobs Act was signed into law in December 2017, it also expanded the benefits of tax-favored 529 savings from what were previously allowed.
A 529 plan is an indispensable tax advantaged tool that allows parents to save for their children’s education. Originally created in 2001, 529s could only be used for college tuition, but now parents are able to use 529s for K-12 education in private and parochial schools as well. As part of the changes, the owner of the plan may withdraw up to $10,000 for each beneficiary every year. This limit does not apply for withdrawals for college. Contributions to the plans are not deductible on your taxes and earnings for withdrawals for K-12 expenses are tax-free as of this date for everyone. However the withdrawals may or may not be state tax free.
ABLE Account Rollovers
Some parents start savings for their child’s college education in a traditional 529 plan only to learn later that the child has a disability. Before the law was enacted, taking a distribution from a 529 plan to fund an ABLE account was considered a non-qualified withdrawal and triggered a 10% penalty on the earnings portion. The new tax plan now allows existing 529 savings plans to be rolled over penalty-free into a 529 ABLE account. There is a $15,000 limit (less the current tax-year contributions).
Use of 529 Accounts in Estate Planning
The passage of new rules for 529 accounts left the door open to use the plans in estate planning. Contributions to a 529 are considered a completed gift from the donor to the beneficiary even though the donor can maintain control of the money in the account.
The wealth transfer potential can be substantial. With 529 plans, the value in the account is removed from your taxable estate and you retain full control over the account and may take the money back at any time (subject to applicable penalties). The special tax rules that govern 529 plans also allow grandparents to save for their grandchildren’s college education in a way that simultaneously pares down their estate and minimizes potential gift and estate taxes.
Changes to the 529s may seem simplistic but are complicated. If you are considering moving money from one account into a 529 plan, or are considering opening an account, be sure to speak with the appropriate financial and tax professionals. Estate planning attorneys can also offer guidance on how to utilize 529 plans as part of broader estate planning objectives.