The costs of going to college have continued to rise over the past decade. One way to help alleviate the high costs of education is to take advantage of tax-advantaged savings plans. One such plan is called a Section 529 education savings plan. An education savings plan allows individuals to open an investment account for the beneficiary's future education expenses, such as tuition, room and board, materials, and fees. These savings plans can generally be used at any college or university in the U.S. (and some overseas).
These plans are intended to encourage families to save money towards family educational cost, including tuition and other specified expenses. Like other investment accounts, participants can generally select among investment portfolio options. These often have target-date portfolios targeted to the beneficiaries' anticipated date when they might start college. Like a retirement fund, these portfolios may get more conservative as the target date approaches.
The Internal Revenue Service (IRS) has recently issued guidance on 529 education savings plan changes. According to the IRS news release, there are 3 recent tax law changes affecting these 529 plans, including 2 changes included in the Tax Cuts and Jobs Act (TCJA).
One of the changes under the TCJA allows 529 plans to be used to pay for elementary and secondary education costs. This provides a tax-advantaged benefit to those paying for up to $10,000 in tuition for public, private, and religious schools.
Another change allows 529 funds to be rolled over into an ABLE account for the same beneficiary. An ABLE account (Achieving a Better Life Experience) is a tax-favored account for individuals who become disabled before the age of 26. ABLE accounts are intended to allow disabled individuals and their families pay for disability-related expenses. However, rollovers combined with ABLE contributions cannot exceed the annual limit for ABLE accounts.
The third change noted by the IRS announcement applies to beneficiaries who receive a refund of tuition or other qualified education expense. If the beneficiary puts the refund back into the 529 account within 60 days, the refund is not taxed. This situation may apply to a student who drops a class after paying tuition and fees. The student would have to re-contribute any refunded amount back to the 529 to avoid paying taxes on the refund.
If you have any questions about 529s or other tax-advantaged savings plans, Butterfield Schechter LLP is here to help. We are San Diego County's largest firm focusing its law practice on benefits and tax law. Our firm can provide tax counseling and help you avoid tax penalties or IRS litigation. Contact our office today with any questions on how we can help you utilize these types of tax-advantaged savings plans.