Under prior tax law, Sec. 529 plans were designed to offer a tax-advantaged savings tool for higher education costs. In addition to the earnings in the account being tax-free if used for higher education, over 30 states allow a form of deduction or credit from state income taxes for contributing to these accounts. The TCJA provisions for 529 plans have expanded the usefulness and planning opportunities available for families by allowing up to S10,000 in these plans to be used for elementary and high school costs annually at public, private, or religious institutions.
Planning
Contributions to 529 plans can be made by anyone, not only family members, and qualify for the $15,000 annual gift tax exclusion. Taxpayers can elect to contribute up to $75,000 in one year and treat the contribution as made ratably over a five-year period. This allows the full $75,000 to begin accumulating tax-free in year 1 until it is needed for education costs from kindergarten through college. If the growth exceeds needed costs for education, the account owner can transfer funds to another beneficiary to use for qualified expenses.
Additionally, the TCJA allows families to roll money from a 529 plan into an ABLE account (created by the Achieving a Better Life Experience Act of 2014, P.L. 113-295) for expenses associated with special-needs children. The ABLE account must be owned by the designated beneficiary of the 529 account or a member of that designated beneficiary’s family. These rollovers are income tax and penalty free for rollovers from 2018 through 2025.
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