How will the new tax changes impact college planning?
Let’s get right to the point, the changes will help many families. The tax reform changes now allow 529 plan distributions to be used tax-free (federally) for private elementary and secondary school expenses (K-12). Each student will be able to take up to $10,000 per year for public, private and religious schools. Before this, tax-free distributions were only allowed for qualified higher education expenses (college).
Before taking any 529 distributions for K-12 expenses you should check with your state to determine if they consider K-12 expenses to be “qualified”. If they are not considered qualified, then the state could assess state income tax and penalties on the earnings portion of the distributions.
The new changes also allow for tax-free rollovers of 529 Savings accounts to 529 ABLE accounts, as long as the beneficiary is the same person or member of the same family as the original 529 Savings account. Rollovers will be limited to the annual contribution limit which will be $15,000 in 2018. Additional contributions are allowed under certain circumstances. ABLE accounts are similar 529 Savings accounts as they allow for tax-free growth and withdrawals are tax-free when used for qualified disability expenses.
All in all, the changes should encourage families to save more and choose 529 accounts over Coverdell accounts as the preferred education savings vehicle. Saving is just one part of a sound college plan. Remember to also incorporate “Late Stage” planning strategies such as college selection, tax aid and financial aid when paying for college. The time invested will be well worth it.