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Strategies for 529 and ABLE Plans Need Review Under New Tax Law

MP900407458If your family has 529 or ABLE accounts, these changes may impact how they work within your larger financial plans. It is time for a review!

With the passage of the 2017 Tax Act, up to $10,000 from Section 529 plan funds may now be used for elementary or secondary school expenses. That’s a big change for parents with children in private schools.

As noted in Think Advisor’s recent article, “Investing in 529, ABLE Plans? Better Check Tax Law Changes,” the new law will permit Section 529 plan funds to be rolled over into an ABLE account for the designated beneficiary or the designated beneficiary’s family member, in an amount up to the annual 529 plan contribution limit. (These rollovers would offset other contributions made to the ABLE account for the year.) Any amounts rolled over in excess of the limitation are included in the distributee’s gross income when they’re distributed. These rules are effective for rollovers that happen after December 31, 2017 and before January 1, 2026.

The new rules for elementary and secondary school expenses could mean that some people may want to open a second Section 529 plan for K-12 school expenses.  However, the $10,000 amount applies on a per-student basis and not a per-Section 529 account basis. Therefore, if the student is a beneficiary of several accounts, he or she can only receive a maximum of $10,000 from all the accounts. Anything over the $10,000 will be taxable.

ABLE accounts also underwent some significant changes with the 2017 Tax Act. The new law expanded ABLE account contribution rules, so that the account beneficiary can now contribute his or her earned income, even if the contribution (when added to other contributions) results in the contribution levels going over the annual contribution limit (which is tied to the annual gift tax exclusion amount: $15,000 for 2018).

Bear in mind that while the account beneficiary’s contribution is limited to either her income or the federal single-person poverty limit—whichever is lowest—this additional contribution is not available to account beneficiaries who contribute to 401(k), 403(b) or 457(b) plans. ABLE account beneficiaries who contribute to their account are eligible for the saver’s credit. This applies for tax years beginning after December 31, 2017 and before January 1, 2026.

Together, these changes may present entirely new opportunities for planning at all levels of education, particularly for those who are supporting a disabled child.

Reference: Think Advisor (April 17, 2018) “Investing in 529, ABLE Plans? Better Check Tax Law Changes”