The IRS recently released new guidance for Section 529 plans. 529 plans are tax-advantaged investment accounts established to fund a child’s or grandchild’s education. New laws – including the 2017 Tax Cuts and Jobs Act – changed Section 529 laws. In July, IRS issued Notice 2018-58 as temporary guidance about the changed laws. This temporary guidance will ultimately become part of more permanent regulations.
There are three changes addressed in the Notice.
Elementary or Secondary School Tuition. The new guidance allows distributions from 529 plans to be used to pay for tuition only at elementary and secondary private and religious schools up to $10,000 per year. Previously, 529 plan distributions could only be used for higher education. Parents and grandparents now have more flexibility to fund a child’s complete education in a tax-advantaged manner.
How can this help you? You wish to fund your grandchild’s complete education, including her tuition at a private elementary and secondary school as well as a college education. You make contributions to a 529 account for her. Each year she attends private school, distributions of up to $10,000 can be used to pay the private school tuition.
Tuition Refunds May be Recontributed to the 529 Account. If a distribution from a 529 is made to an educational institution and is subsequently refunded for any reason, the refunded money can be recontributed to the 529 plan. Previously, the refund would have been subject to tax and potentially a penalty. The IRS requires that the refund be recontributed to the account within 60 days of receipt.
How can this help you? You took a distribution from your child’s 529 account and paid the full year’s tuition to the university. Your child leaves school after first semester and the university refunds the second semester’s tuition. The refund may be recontributed to the 529 account.
Rollovers to ABLE Accounts. ABLE accounts are tax-advantaged savings plans for disabled individuals that can be used to pay for qualified disability expenses. The IRS now allows funds in a 529 plan account to be rolled over to an ABLE account without taxes or penalties, subject to contribution limitations. This allows the parents or grandparents of a disabled minor or young adult who is unlikely to go to college to move 529 assets to a more appropriate ABLE account.
How can this help you? You funded a 529 account when your child was young to fund his college education. The child is now college age, but due to his or her disability, is unable to attend college. You can rollover the 529 to an ABLE account and use the funds to pay for certain expenses arising from the child’s disability.
The benefits of funding 529 plans are numerous. Most importantly, 529 contributions by parents and grandparents result in income and estate tax savings. In addition, 529 plans are simple to set up and inexpensive to administer. For a more in depth discussion of the benefits of 529 plans, see my prior post.