2018 Tax Law Changes: 529 Plans
One of the many things affected by the new tax laws are 529 college savings plans. 529 plans may now be used for kindergarten through 12th grade tuition as well as costs for higher education. If you will remember, 529 plans are a saving vehicle for education costs that grow tax-free; withdrawals are tax-free if used for education expenses.
Tax-free withdrawals from a 529 for K-12 are limited to $10,000 per year, per student. If the student is a beneficiary of multiple 529 accounts, the $10,000 may be distributed from one of more of the plans. Any withdrawal above the $10,000 mark will be taxed according to Section 529.
The majority of states have a fairly high 529 plan contribution limit, and most states provide residents a state tax deduction for contributions. However, contributions are not deductible for federal tax purposes.
Rollovers are permitted. Federal allow does allow 529 savings for a beneficiary to be rolled over tax free within sixty days to a 529 account for the same beneficiary. Rollovers are also permitted from one beneficiary to another, as long as the beneficiaries are members of the same family, such as a sibling. One last rollover option is a rollover from a 529 plan to an ABLE account owned by the beneficiary or another family member of the beneficiary. ABLE accounts are tax-advantaged accounts for disabled individuals. As of now, the 529 to ABLE account provision will expire after 2025.
For further information, please visit the following link for LPL’s Summary of State Tax Implications for 529 Plans.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.