Tax Cuts, Jobs Act And 529 Plans Expanded

By Jon L. Ten Haagen, CFP ®
asktheexpert@longislandergroup.com

How do 529 College Savings plans and the government’s now expanded scope that include saving for K-12 schooling affect you?

Before the  move was approved, the government was considering other changes, including elimination of Coverdell Education Savings Accounts, the Lifetime Learning Credit and the Student Loan Interest deduction; and taxation of tuition waivers primarily used for graduate students and employees of higher education institutions.

Happily, none of these provisions made it into the final legislation

What did make the cut was an expansion of the use of 529 plans – now allowing K-12 expenses. Starting in 2018, annual withdrawals of up to $10,000 per student can be made from a 529 college savings plan account for tuition expenses in connection with enrollment at an elementary or secondary public, private or religious school – but excluding home schooling. These withdrawals are now tax-free at a federal level.

Around 20 states and Washington, D.C. have automatically updated their own legislation to conform with the federal 529 legislation. The remaining states will need to address their legislation to conform with that of the feds. They will have to address other parts of their state tax benefits for K-12 expenses – deductions for K-12 contributions.

Other details must be considered by parents looking into the benefits of investing in the K-12 arena.

Learn about your state’s rules regarding how K-12 funds will be treated for tax purposes. Consult with 529 plan administrator to determine if the withdrawal request as to whom the check should be made to: the account owner, the K-12 institution, or the beneficiary?

As we go forward, I am sure we will get more clarification.

These expansions could impact Coverdell Education Savings Accounts, which let families save up to $42,000 a year, tax-free for K-12 and college expenses. The interest in ESAs may be less because of the small amount allowed, $2,000 vs. $350,000 and up for 529 plans. However, Coverdell’s have an advantage over 529s: Investment choices.

Coverdell’s give a lot of choices of investments they can hold, and they can change these as often as they want. As for 529 plans, they can only invest in the portfolios offered by the plan. Usually, one or maybe two fund choices made by the plan administrators. Also, you can only change the investment twice a year. Choose carefully. All 529 plans have different investment choices.

Go to Collegesavings.org for a list of 529 plans offered by state and a comparison tool. Note: If you choose an out-of-state plan because of what you view as a better investment choice, you may loss the tax benefits of an in-state plan. Check with your advisor to be prepared.

Contributions can be made to a plan by parents, grandparents – a great way for them to reduce their estate because they can contribute up to five years of contributions up front – family and friends. The maximum contribution levels are still the same, but they can come from various sources.

Those considering investing for K-12 schooling, should confer with an advisor who knows the rules of engagement.