The House Ways and Means Committee’s tax plan, released Thursday, expands the qualified expenses associated with a 529 college savings plan, which “may help to reduce parents’ concerns” about limitations associated with the plans and make investing in a 529 plan “more palatable,” according to Martha Kortiak Mert, chief growth officer for Savingforcollege.com.
“Parents worry that they’ll end up with extra money in their  accounts, and will have to pay a penalty on those earnings if they want to withdraw, which they could have avoided had they just put the money in a mutual fund,” Kortiak Kert told ThiinkAdvisor.
Parents’ concerns persist despite the fact that 529 plans “already offer a great deal of flexibility, with the ability to easily change beneficiaries (to another child or a grandchild, for example), and allowing parents to withdraw amounts equal to scholarships received without facing penalties.”
The proposed tax bill would also allow the opening of a 529 plan account for a child in utero.
The bill, the Tax Cuts and Jobs Act, intends to consolidate 15 tax benefits relating to education that often overlap. (The Senate bill released Nov. 9, does not alter the House plan on 529s)
The bill adds “elementary and high school expenses (of up to $10,000 per year) to the list of qualified expenses, as well expenses associated with apprenticeship program,” Kortiak Mert explained.
As it stands now, investments in 529 plans grow tax-free and are not taxed when used to pay for qualified higher education expenses. The earnings portion of nonqualified 529 plan withdrawals are subject to income tax as well as a 10% penalty.
The GOP tax plan would also end all contributions to Coverdell ESAs after 2017, but would allow tax-free rollovers into 529 plans.
Under the proposed tax plan, Coverdell account owners will be able to make tax-free rollovers into a 529 plan, so owners who roll over can continue to accrue tax-free earnings, but they'll have fewer restrictions and more ways to spend the money in a 529 plan.
Coverdell ESA accounts come with limitations. "Individuals earning less than $110,000 (or $220,000 for married couples filing jointly) may contribute up to $2,000 per beneficiary per year, and only up until the beneficiary turns 18,” Savingsforcollege.com explained.
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