Last year’s tax cut bill made several parent-friendly changes to 529 education plans, the popular tax-advantaged savings accounts parents use to help pay their kid’s college tuition. Yesterday, the IRS and Treasury Department announced they was issuing guidelines to implement the three new changes, and they’re worth noting if you’ve been socking money away for your kid’s 2035 tuition bill.
The biggest change, by far, is that the money is no longer tied to higher education, as has traditionally been the case. According to the 2017 Tax Cuts and Jobs Act (TCJA), parents can now use the money in their 529 plans to pay up to $10,000 a year in tuition per child at “an elementary or secondary (K-12) public, private or religious school of the beneficiary’s choosing.” What constitutes an “elementary or secondary school” will be defined by the IRS in the new guidelines and is expected to be consistent with those outlined in the similar Coverdell education savings accounts.
The $10,000 cap only applies to K-12 education ⏤ so parents can still withdraw an unlimited amount annually to cover college tuition ⏤ but if parents withdraw more than the $10,000 per year, they’ll be hit with a 10-percent penalty. Also, states are not obligated by the federal changes and may still tax any money withdrawn to cover K-12 expenses.
The new tax law also allows parents to roll funds from their 529 plan into an ABLE account, “a tax-favored account for people who have become disabled before age 26.” The goal of ABLE accounts is to allow families to save money tax-free to pay for expenses related to the disability. Right now, the annual contribution limit on ABLE accounts is $15,000 and that will remain a hard cap, regardless of whether the money is rolled over from a 529 or deposited separately.
And finally, a change not linked to the recent tax law but rather to the Protecting Americans from Tax Hikes (PATH) Act of 2015 cuts parents a break if their kid gets mono or drops out of college mid-semester. The new guidelines will allow beneficiaries, i.e. students, to redeposit any refund of tuition or education expenses into their 529 plan within 60 days without getting hit with taxes. Even better, the redeposit would not count against annual contribution limits.