Impact on 529 Plans
The Tax Cuts & Jobs Act treats up to $10,000 a year for elementary and high school expenses per student as qualified under the Section 529 plan rules. Previously, Section 529 money could only be used for post-secondary education – think college and graduate schools. But now, the Tax Cuts & Jobs Act allows the same money to be used for private school tuition at the grade school and high school levels, K through 12. This is very much a point you should be making to your parent and grandparent clients. Many would jump at the chance to fund or offset Junior’s tuition and fees for private grade school and/or high school. Hammer this point home and perhaps you could cultivate a professional referral source relationship with a trusted financial advisor from all the new money flowing into these educational plans.
State Plans
Check with your specific state plan to verify you do not run afoul of any holding period requirements. Additionally, take the belt-and-suspenders approach and make sure your state follows the enacted federal law and permits K-12 distributions. But do yourself a financial favor and apprise your clients of these educational reforms.
ABLE Plans
Similar to 529 plans and retirement accounts, ABLE plans allow funds to accumulate tax free and to make distributions that are not taxed when such distributions are used to pay the beneficiary’s qualified disability expenses. These expenses include housing, transportation, health care and related services, personal assistance, and employment training and support. The Tax Cuts & Jobs Act provides that a 529 plan account owner can transfer funds in his or her 529 plan to an ABLE plan tax-free before 2026. The advantage of doing this is that the beneficiary may no longer need 529 plan account balances for educational expenses and can use amounts transferred to an ABLE plan to pay for disability-related expenses. Contributions to an ABLE plan from all donors combined during the year cannot exceed the annual gift tax exclusion, which is $15,000 in 2018. Each state sets its own ABLE plan lifetime limit, which in many states is $350,000 or greater.
For more on this topic, register for our upcoming webinar: Funding Education After Tax Reform: Section 529 and ABLE Accounts (TPLA).