Updated: Jun 22, 2022
Dear Clients & Friends, This weekend, I thought that we’d celebrate one good thing included in the new tax legislation passed late last year. There are a few positive attributes to this new legislation that benefit a large swath of Americans, no matter their income level. While many of us have been distracted by numerous questionable changes, there have been some positive developments on the education front. First, it’s become apparent that many people think that the income tax deductions for student loan interest have been repealed. This was included in the original plan, but after millions of angry letters from students and parents, Congress realized that making higher education less affordable was maybe, sort of, kind of a bad idea. Thus, the law remains unchanged: taxpayers earning less than $80,000 per year ($165,000 if married filing jointly) can deduct up to $2,500 of student loan interest from their taxes. But the big changes that we are excited to teach our audience about relate to 529 plans. Here they are… Expansion of 529 plans to allow K-12 expenses Under the new law, the definition of a 529 plan "qualified education expense" has been expanded to include K-12 expenses. Starting in 2018, annual withdrawals of up to $10,000 per student can be made from a 529 college savings plan account for tuition expenses in connection with enrollment at an elementary or secondary public, private, or religious school (excluding home schooling). Such withdrawals are now tax-free at the federal level. At the state level, roughly 20 states and the District of Columbia automatically update their state legislation to align with federal 529 legislation, but the remaining states will need to take legislative action to include K-12 expenses as a qualified education expense and, if applicable, extend other state tax benefits to K-12 expenses; for example a deduction for K-12 contributions. 529 account owners who are interested in making K-12 contributions or withdrawals should understand their state's rules regarding how K-12 funds will be treated for tax purposes. In addition, account owners should check with the 529 plan administrator to determine whether a K-12 withdrawal request should be made payable to the account owner, the beneficiary, or the K-12 institution. It's likely that 529 plans will further refine their rules to accommodate the K-12 expansion and communicate these rules to existing account owners. The expansion of 529 plans to allow K-12 expenses will likely impact Coverdell Education Savings Accounts (ESAs). Coverdell ESAs let families save up to $2,000 per year tax-free for K-12 and college expenses. Up until now, they were the only game in town for tax-advantaged K-12 savings. Now the use of Coverdell ESAs may decline as parents are likely to prefer the much higher lifetime contribution limits of 529 plans — generally $350,000 and up — compared to the relatively paltry $2,000 annual contribution limit for Coverdell accounts. Coverdell ESAs do have one important advantage over 529 plans, though — investment flexibility. Coverdell owners have a lot of flexibility in terms of what investments they hold in their account, and they may generally change investments as often as they wish. By contrast, 529 account owners can invest only in the investment portfolios offered by the plan, and they can exchange their existing plan investments for new plan investments only twice per year. A list of 529 plans offered, by state, and a comparison tool are available at collegesavings.org. Expansion of 529 plans to allow transfers to ABLE accounts The new tax legislation also allows 529 account owners to roll over (transfer) funds from a 529 plan to an ABLE plan without federal tax consequences. This ability to transfer funds will expire at the end of 2025 unless a future Congress acts to extend the law. An ABLE plan is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26. Like 529 plans, ABLE plans allow funds to accumulate tax deferred, and withdrawals are tax-free when used to pay the beneficiary's qualified disability expenses, which may include (but are not limited to) housing, transportation, health care and related services, personal assistance, and employment training and support. ABLE accounts have annual and lifetime contribution limits. Contributions from all donors combined during the year cannot exceed the annual gift tax exclusion ($15,000 in 2018). As for lifetime limits, each state sets its own limit, which is also the state's maximum for its 529 college savings plan contributions. In most states, this limit is at least $350,000. The ability to rollover 529 balances into an ABLE account is a significant improvement. It is not uncommon for infants to receive significant gifts into a 529 plan from friends and family. For example, we here at MOR Wealth Management just opened and funded two 529 plans for a staff member who recently gave birth to beautiful twins. However, if a young child growing into toddlerhood begins to exhibit signs of developmental delays, among the first questions raised are- how do we protect their money, and what action do we take with regards to their education funds. Needless to say, the ability to rollover education funds into an ABLE account is a meaningful development. That said, such a rollover can sometimes have adverse effects on Medicare/Medicaid planning, so more consultation based on an individual’s circumstances would be necessary. But it is indeed a very positive development. We wish you all a lovely weekend, and a joyful celebration of the Eagles Super Bowl victory! Cheers.
Research provided by Broadridge Investor Communication Solutions.
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
1801 Market Street, Suite 2435 Philadelphia, PA 19103 P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300 Vero Beach, FL 32960 P: 772-453-2810
The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency.