Two 529 College Savings Plans Tax Law Changes
If you are like me, the tax bill that was released in December 2017 was a lot to consume, especially right before the holidays. I was thinking about turkey, gravy and presents — definitely not taxes. This week, as we continue USAA’s series that breaks down the tax law changes, let’s take a look at two changes in 529 college savings plans.
Change 1: You can now use $10,000 from your 529 plan account to pay for K-12 tuition each year tax-free.
Beginning Jan. 1, 2018, 529 plan account distributions are tax-free for elementary and secondary (K-12) qualified tuition expenses. That includes public, private and religious schools, up to $10,000 per student per year.
The tax treatment of such withdrawals at the state level, determined by the account owner's state of residence, may vary from state to state. Account owners should consult their tax advisors for further guidance.
Pro: This new provision can help pay for your child’s public, private or religious school tuition. (Speak with a qualified tax advisor or check IRS regulations for a list of qualified tuition expenses.)
Con: The benefit of having a 529 plan account is not only tax-free withdrawal of qualified expenses, but also tax-free growth. You can only take advantage of that tax-free growth if you leave your money in the account long enough for it to grow. Here is a quick example to illustrate how growth can help pay for college. If a 529 plan account contains $5,000 when a child is born, that $5,000 may grow to $14,000 over the next 18 years (assuming a 6% annual return[1]). Any money withdrawn before college, even if it’s used for childhood education expenses, decreases the total amount in your account, which in turn decreases the amount of tax-free growth in the 529 account. As you can see from this example, growth can be a large portion of the account.
Change 2: You can roll money tax-free from your 529 plan into an Achieving a Better Life Experience (ABLE) account.
529 plan account distributions made between Jan. 1, 2018 and December 31, 2025 can now be rolled over tax-free to an ABLE account for the same beneficiary or a member of the beneficiary’s family.
Previously, if you had a 529 plan account balance and the beneficiary could no longer use the balance due to a disability, you would need to either change beneficiaries or take a distribution that would be subject to taxes on the growth. With the tax law change, you can now roll over 529 plan account balances tax-free into an ABLE account and not give up the valuable tax-free growth. Note that the 529 plan account rollover amount counts against the annual ABLE account contribution limit ($15,000 for 2018). Any amount rolled over that, together with other ABLE account contributions for the year of the rollover, exceeds the annual ABLE account contribution limit is still taxable.
Why is this important? Caring for a child with a disability is expensive, and the ABLE account has qualified expenses that are more applicable to a person with a disability than a person going to college. Therefore, the ABLE account enABLEs you to better pay for those disability expenses by allowing you to repurpose funds initially set aside for college. The ABLE also allows you to save up to $100,000 without forfeiting eligible government assistance programs.
I hope this quick venture into these two changes has helped you to better understand how the tax act can affect your family’s education savings. For additional information on college savings, visit usaa.com/529.
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Consider the investment objectives, risks, charges and expenses of the USAA 529 College Savings Plan (Plan) carefully before investing. Download a Plan Description and Participation Agreement containing this and other information about the Plan from USAA Investment Management Company, Underwriter and Distributor. Read it carefully before investing. If you or the beneficiary are not residents of the state of Nevada, consider before investing whether your or the designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Please consult your tax advisor.
Interests in the USAA College Savings Plan™ (Plan) are municipal fund securities issued by the Nevada College Savings Trust Fund (Trust). The value of an investment in the Plan will vary with market conditions. The Plan is administered by the Board of Trustees of the College Savings Plans of Nevada (Board). USAA Investment Management Company provides investment management services to the Portfolios, and markets and distributes the Plan. Ascensus Broker Dealer Services, Inc. serves as the Program Manager as well as effects account owner transactions in the Plan. Interests in the Plan are not guaranteed by the Trust, the Plan, the state of Nevada, the Board or any other governmental entities, or any USAA or Ascensus entities and you could lose money.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.
This document is not legal, tax, or investment advice. It is only a general overview under the federal tax laws. The laws governing these topics are complex, the penalties are severe, and the laws of your state may differ. Consult your tax and legal advisors regarding your specific situation."