IRC Section 529 plans offer one of the most effectives paths to saving for a child or grandchild’s educational expenses.
However, many clients aren’t fully aware of the various tax regulations that apply to these accounts. The murkiness is compounded by changes that came courtesy of Trump’s tax reform bill.
The first thing to be aware of is contribution limits. If no other contribution is made to the beneficiary, it’s possible to contribute $15,000 in 2019 without incurring any tax liability. It’s also possible to bundle contributions, making a $75,000 in one year rather than over 5 years for gift tax purposes.
These plans are funded with after-tax dollars, and thus accounts grow on a tax-free basis. As a consequence, the distributions are tax free provided they are used for qualified educational expenses. But what IS a qualified educational expense? Tuition, of course, but also fees, books, supplies and equipment required for enrollment at an eligible institution. Reasonable costs for room and board are allowed, but may be subject to limits such as the actual amount charged by a school for housing.
Most people think of these plans as intended to fund only college expenses, but the 2017 tax reform bill expanded coverage. Now, up to $10,000 annually can be used for elementary or secondary school expenses. This is on a per-student basis, so if the child is the beneficiary of multiple accounts, he or she can only receive $10,000 in total – not $10,000 from each account.
Clients are also allowed to fund multiple plans for different children without incurring gift tax, as long as the annual contribution does not exceed the $15,000 annual limit. The client can also change the plan beneficiary, for instance in the case that a child chooses not to attend college.
Deadlines for contributions vary by state, but many states require that all contributions be received by December 31. Others are more relaxed, and the contribution check must be postmarked by December 31. Some even model their regulations on IRA contribution rules and make the deadline April 15 of the following year.
For more on the regulations, please see;
Top 10 Tax Facts for 529 College Plans in 2019