Financial Fitness

Changes to 529 Plans and Other Tax Reforms for Education Savings

How tax reform could impact your education savings.

by Sarah Tuff Dunn - October 03, 2019

For many years, Section 529 plans (qualified tuition plans) were like department store mannequins: solid and able to attract customers with what they had to offer — but a little stiff. Thanks to the passing of the Tax Cuts and Jobs Act (TCJA) on Dec. 22, 2017, 529 plans have become more like marionettes: flexible and responsive to how customers pull the strings.

It’s no longer just for college

“529 plans are popular education-savings vehicles, and now they’re becoming even more attractive, especially for affluent clients who are restricted from using other tax-deferred education-savings vehicles,” says Tracy Green, Planning & Life Events Specialist for Wells Fargo Advisors.

The TCJA expands the definition of qualified education expenses to include up to $10,000 per year per beneficiary for elementary and secondary education tuition. Previously, it was a higher education only savings plan. The TCJA also allows 529 assets to be rolled into Achieving a Better Life Experience (ABLE) accounts for children who become blind or disabled before age 26, up to the annual contribution amount.

There’s an option to switch savings plans

Before the passage of the TCJA, many families looking into private schools used a Coverdell Education Savings Account (ESA) for elementary and secondary education — with an important limitation. “Individuals using the Coverdell ESA were limited to a maximum $2,000 per year contribution,” says Green, “which generally won’t cover much of private K-12 tuition costs.”

Now, parents and grandparents can roll over Coverdell ESA savings into the more flexible 529 plan or start a new 529 plan. If a parent saves using a 529 plan, she can contribute up to $15,000 for 2018 without any gift tax consequences; or, she can choose to make the five-year accelerated gift of $75,000 as long as no other gifting is made to that beneficiary during that period. (This is per donor, meaning that spouses could actually contribute up to $150,000 to a 529 plan in one year.)

“If 529 funds are going to be used to pay for elementary and secondary tuition expenses, then it is going to lessen the amount of time for potential tax-deferred growth,” says Green. “Parents and grandparents may need to adjust their contribution amounts if they plan to pay for higher education as well. For this reason, it may be even more important to consider the five-year accelerated gifting option to front-load a 529 plan.”

“529 plans are popular education-savings vehicles, and now they’re becoming even more attractive.”

— Tracy Green, Planning & Life Events Specialist, Wells Fargo Advisors

Green adds that 529 plan savings and distributions may impact financial aid applications for private elementary schools, private high schools, and colleges —another factor for parents and grandparents to consider.

Individual states may not follow suit

While the TCJA creates federal guidelines for 529 plans, it still allows states to create their own parameters. So check with your state before taking a distribution for a K-12 education payment, Green advises. “The biggest unknown at this point is whether or not states will follow the new federal definition,” she says. “Since many states offer some type of tax savings for residents, it will be important to know your state’s view to avoid any potential taxes, penalties, or recapture of a prior year’s tax deduction or credit.”

Sarah Tuff Dunn is a freelance writer in Vermont and a frequent contributor to Lifescapes. Her work has also appeared in The New York Times.

Image by iStock

Additional Resources

For more information on tax planning, visit the Wells Fargo Advisors Tax Center.

Wells Fargo Advisors does not provide tax or legal advice.

Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest. The availability of tax or other benefits may be conditioned on meeting certain requirements.

An investor should consider, before investing, 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 529 college savings plan.