New Tax Law Expands 529 and ABLE PlansSubmitted by Bernhardt Wealth Management on March 19th, 2018
In addition to almost doubling the personal exemption and providing breaks to businesses, the new tax law signed by President Trump in December contains a provision that could be very helpful for parents and grandparents who are trying to fund a child’s education or pay for a disabled child’s care.
Section 529 of the Internal Revenue Code allows for what it calls “qualified tuition plans” into which parents or grandparents can deposit funds earmarked for future education costs. The funds then accumulate without incurring taxation of the interest or gains. Originally, the funds could be used only for tuition and other qualified expenses associated with attending a college or university. But under the new tax law, these accounts may now be used to fund expenses related to K–12 private schools. Up to $10,000 per year may be withdrawn from a 529 plan for qualified expenses, and the withdrawals, like the plan accumulations, are tax-free.
According to the College Savings Plan Network, total US investment in 529 plans is just over $275 billion, with accounts averaging a balance of $21,000. While final figures are not yet available, projections indicate that 2017 investment in the plans will push the total over $300 billion.
Forty-nine states and the District of Columbia offer 529 plans, and 33 of the states offer a tax break to parents, grandparents, or others who contribute to such a plan (Wyoming is the sole state that does not offer the plan). Currently, 19 states and the District of Columbia automatically update their legislation to align with federal guidelines for 529 plans, so the new expansion to K-12 expenses will automatically go into effect in these states: Alaska, Colorado, Connecticut, District of Columbia, Illinois, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Missouri, Montana, Nebraska, New Mexico, New York, North Dakota, Oklahoma, Rhode Island, Tennessee, and Utah. Residents of other states will need to verify their state’s rules before using the plan for K-12 tuition and other costs. To see a list of plans available in each state, click here.
Another important benefit conferred by the new law is the ability to transfer funds from a 529 plan to an ABLE plan. ABLE plans were created by the Achieving a Better Life Experience Act of 2014, which stipulated tax-advantaged savings plans to assist individuals with disabilities and their families. These plans, similar in function to 529 plans, permit tax-free accumulation and withdrawal of funds to pay disability-related expenses for persons who become blind or otherwise disabled before age 26. ABLE plans are subject to annual contribution limits (they cannot exceed the annual gift tax exclusion of $15,000), and each state sets its own lifetime limit–generally, the same as the state’s lifetime limit for 529 plans, which is typically $350,000 or more. A list of state ABLE plans is available here.