Here Are the New ABCs of 529 Plans

Most parents will jump for joy to hear that Section 529 Plans can now be used for private elementary and high school tuition in addition to paying for college.

What’s Different?

In the past, parents often used tax-favored Section 529 plans to save for the college education of their children. Now Tax Reform – the Tax Cuts and Jobs Act (TCJA) — expands the scope of these programs. Beginning in 2018, the definition of qualified expenses is broadened to include tuition for enrollment at an elementary or secondary public, private or religious school. However, the new law limits the tax-free distributions to $10,000 a year.

Section 529 tax breaks to home schooling expenses were removed from the final version of the law.

Why Are 529 Plans So Terrific?

The perk is tax advantages! With 529s, you have to pay normal income tax on the money you put into your plan, but you don’t pay taxes on the earnings that grow in the account, or when you take them out to pay for college. This is always the case, as long as you use the proceeds for mandatory fees, books, tuition, room, board or other college-related expenses. 529 Plans offer high contribution limits, and there are no income limits for contributing.

Normally, you can give each recipient an amount up to the annual gift tax exclusion without paying any gift tax. The exclusion for is 2018 is $15,000 per recipient ($30,000 for joint gifts by a married couple). Few people know about a special rule that allows you to contribute up to five years worth of gifts to a Section 529 plan in just one year. So you can effectively transfer up to $75,000 to your child’s account ($150,000 by a married couple) with zero gift tax liability!

How do 529 Plans compare to a trust fund? A trust offers much greater flexibility in fund disbursement than a 529 plan does, and you can decide when your child receives the funds. But the main disadvantage with a trust fund is the tax impact. Money in 529 accounts grows tax-free, and won’t be taxed if it’s taken out for qualified educational expenses.

How Does It Work?

There are two main types of Section 529 Plans used for college funding:

1.    Prepaid Tuition Plans: This type of plan is designed to keep pace with the rising cost of college tuition. Suppose it now costs $25,000 a year to send a child to a State University. You can pay $25,000 this year to buy shares in the tuition plan for a young child. When the child is ready to go to school, the shares can pay for an entire year of tuition—no matter how much tuition costs have risen. This type of plan is like an insurance policy.

2.    College Savings Plans (or Investment Plans): In contrast to a Prepaid Tuition Plan, there’s no guaranteed lock on future tuition costs with this type of plan. But you may earn a better return from your investment because you choose how to invest the money you are saving. Usually, such a plan will offer an asset allocation strategy geared to the current age of the child or the year he or she will enter school. For example, the plan may provide more aggressive investments in the early years and switch to more conservative investments later. With an investment plan, you have the freedom to decide how you want to use that money. You still have to use it for educational expenses, but you’re not locked into only using it for tuition or college expenses the way you would be with a prepaid plan.

The good news is that with either type of plan there’s no current tax on the growth of funds within the account. And any distributions are tax-free as long as they are used to pay for qualified expenses like tuition. The bad news is that contributions to a 529 plan aren’t deductible.

Almost every state has a 529 plan, but the plan will vary from state to state, as will the contribution limits. In many states, you can easily stash away the total amount needed to pay for a full college ride. You can invest in any state’s plan, no matter where you live or where your child eventually attends college. In addition to fees and tax incentives, you’ll want to compare minimum contributions and investment options.

Are They Just For Kids?

Not just for the young, 529 Plans can be used for the young at heart. There’s generally no beneficiary age limit for contributions or distributions. Many mid-life adults may enroll in school mid-career to acquire new skills or change industries. Surveys show that Baby Boomers want to stay active in retirement and round out their knowledge or learn a language, even take music appreciation courses in their golden years. If you think you might go back to school in the future, the 529 is a great savings vehicle that you can use.

If you don’t take classes, or have money left over that you don’t use, you can transfer what’s left in your 529 plan to another beneficiary — a child, grandchild, niece or nephew. Should you decide to withdraw any funds to pay for non-qualified expenses, you will owe tax on the earnings plus a penalty. A 529 Plan just might encourage you to take that class you’ve been dreaming about.

Curious About ABLE Accounts, A 529 “Hybrid?”

There is good news here as well for the disabled regarding ABLE accounts! Not only does tax reform allow more money to be contributed to the ABLE account and expand the Saver’s Credit, but now, if eligible, you can roll money from a 529 plan into an ABLE account. Find out more at this IRS link:
https://www.irs.gov/newsroom/tax-reform-allows-people-with-disabilities-to-put-more-money-into-able-accounts-expands-eligibility-for-savers-credit

Contact Us: It’s never too early to start thinking about how your family will pay for college. Your Fuoco Group advisor can assist you in setting up a 529 plan, and discuss other available tax-smart strategies you may want to consider. Our tax and financial professionals can guide you through the process for whichever options you choose, and be sure you are making informed decisions regarding investments, rollovers, changing beneficiaries, and the timing and use of withdrawals. Call toll free 855-534-2727 to learn more.

PS: Don’t forget that many state and local areas have sales tax free holidays for the purchase of school supplies and clothing items in August. Below is a link to information for Florida (August 3-5). New York has not declared a Back to School tax free holiday at this time.
http://floridarevenue.com/backtoschool/Pages/default.aspx