With the passage of President Trump’s Tax Cuts and Jobs Act (TCJA), an old tool in the tax- and estate-planning toolbox has received an update – the 529 plan. Named for Internal Revenue Code 26 U.S.C. § 529, these are generally tax-advantaged savings plans that encourage saving for future education expenses of a designated beneficiary. Since 2001, qualified distributions from 529 plans have been exempt from federal income tax when used for qualified higher education expenses.
The biggest change to 529 plans that the TCJA brings is an expansion to include K-12 public, private, and religious school tuition and other expenses. Starting January 1, 2018, families will be able to withdraw up to $10,000 per year from a 529 plan to pay for pre-college students’ qualified school expenses.
The greatest immediate value will be for parents who already have funded plans, as they will be able to reap the interest and tax benefits of those prior contributions before their children begin college. Nevertheless, parents of school-age and younger children will still be able to see benefits from the change, as contributions to 529 plans are tax-deductible. Withdrawals from these plans are permitted for non-qualified expenses, such as medical expenses or unrelated living expenses, but such withdrawals are subject to income tax and a 10% early-withdrawal penalty on the gains. This penalty is waived under certain circumstances, such as the death or indefinite disability of the beneficiary.
529 plans are administered by each state individually, and Colorado currently has four plans, although this may change with passage of the TCJA. The four current plans are: Direct Portfolio College Savings Plan, Scholars Choice Savings Plan, Smart Choice College Savings Plan, and Stable Value Plus College Saving Program. Each of these is managed by College Invest, a division of the Colorado Department of Higher Education.
The landscape of tax- and estate-planning is constantly shifting, and it’s important to get the best legal and financial advice you can. Let the professionals at Coaty Marchant Woods, P.C. help you with your legal planning needs.