Guidance on 529 Education Savings Plans

IRS Offers New Guidance on 529 Education Savings Plan Changes

Last week, the IRS and Department of Treasury issued Notice 2018-58 which provides new guidance regarding recent tax law changes impacting 529 education savings plans. 529 plans are qualified tuition programs that allow individual taxpayers to prepay or contribute to an account for a designated beneficiary’s qualified higher education expenses.

The guidance comes as a result of changes included within the 2015 Protecting Americans from Tax Hikes (PATH) Act and the Tax Cuts and Jobs Act, passed into law in late 2017. Per Notice 2018-58, 529 plan contributors, beneficiaries and administrators should rely on the Notice’s guidance until further communication is released.

Tuition Refunds

Under the PATH Act, 529 beneficiaries (typically students) who receive a refund of tuition or other qualified education expenses can consider the refund tax-free if recontributed by the beneficiary within 60 days. The Treasury Department and IRS intend to issue future regulations simplifying how these transactions are treated from a tax perspective, including that recontributions will not count against plan contribution limits.

K-12 Education

Per the 2017 tax reform changes, 529 plan distributions may be used to pay up to a total of $10,000 of tuition per beneficiary each year at an elementary or secondary (K-12) school. This applies to public, private or religious schools of the beneficiary’s choosing.

Rollovers to ABLE Accounts

The Tax Cuts and Jobs Act also allows funds to be rolled over from a beneficiary’s 529 plan to an ABLE account for the same beneficiary or family member. Achieving a Better Life Experience (ABLE) programs are intended to pay for disability-related expenses for those who become disabled before age 26. The regulations would provide that rollovers from 529 plans, together with any contributions made to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit – $15,000 for 2018.

If you’re interested in speaking with an MFA member about leveraging a 529 or other college savings plan, please connect with us.

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