As you probably know by now the tax code looks dramatically different when compared to last year.
The recent changes will impact many areas such as tax brackets, deductions and, yes, college planning.
Let’s look at a few of the changes.
529 plans are state-sponsored savings vehicles that allow assets to grow tax-free. Distributions are also tax-free when used for qualified educational expenses. Plan beneficiaries can be changed and the impact on financial aid is minimal. This flexibility and the tax benefits make them ideal college savings vehicles.
The new tax reform now allows 529 plan distributions to be used tax-free (federally) for private elementary and secondary school expenses (K-12). Before this, tax-free distributions were only allowed for qualified higher education expenses (college). Each student will be able to take up to $10,000 per year for public, private and religious schools.
Before taking any 529 distributions for K-12 expenses, you should check with your state to determine if they consider K-12 expenses to be “qualified.” If they are not considered qualified, then the state could assess state income tax and penalties on the earnings portion of the distributions.
Currently, the North Carolina General Assembly has not decided on this matter. That being said, North Carolina residents should wait for a resolution before tapping their 529 accounts for K-12 education expenses.
The new tax changes also allow for tax-free rollovers of 529 Savings accounts to 529 ABLE accounts, as long as the beneficiary is the same person or member of the same family as the original 529 Savings account. Rollovers will be limited to the annual contribution limit which will be $15,000 in 2018. Additional contributions are allowed under certain circumstances.
All in all, the changes should encourage families to save more and choose 529 accounts over Coverdell accounts as the preferred education savings vehicle.
Saving is just one part of a sound college plan. Remember to also incorporate “late-stage” planning strategies, such as college selection, tax aid, financial aid and wealth management when paying for college. The time invested will be well worth it.