The tax reform passed at the end of 2017 made important changes to many areas that financial planners deal with on a regular basis, including educational 529 and 529 ABLE plans. It is important for planners to be aware of these changes, and critically think about the strategies put in place for each client related to these areas.
How does tax reform impact 529 plans?
Most planners already understand the important role the educational 529 plans play in planning for college. Under the 2017 Tax Act, Section 529 plans were expanded to include the use of up to $10,000 per year for elementary or secondary school expenses.
In addition to allowing 529 plans to be used for elementary and secondary school expenses, 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. (Rollovers would offset other contributions made to the ABLE account for the year).
Amounts rolled over in excess of the limitation are included in the distributee’s gross income upon distribution. These rules are effective for rollovers that occur after December 31, 2017 and before January 1, 2026.
Planning Point: The expansion of Section 529 plans to include elementary and secondary school expenses means that some clients may wish to open a second Section 529 plan in order to plan for K-12 school expenses. However, the $10,000 amount applies on a per-student basis (rather than a per-Section 529 account basis), meaning that if the student is beneficiary of several accounts, he or she can only receive a maximum of $10,000 from all accounts (amounts above the $10,000 will be taxable).
How does tax reform impact ABLE accounts?
ABLE accounts themselves also saw significant changes under the 2017 Tax Act. The new law expanded ABLE account contribution rules so that the account beneficiary is now able to contribute his or her earned income even if the contribution (when added to other contributions) causes contribution levels to exceed the annual contribution limit (which is tied to the annual gift tax exclusion amount; $15,000 for 2018).
The account beneficiary’s contribution is limited to the lesser of his or her income or the federal single-person poverty limit. However, this additional contribution limit is unavailable to account beneficiaries who also contributed to a 401(k), 403(b) or 457(b) plan.
If the ABLE account beneficiary contributes to the account, he or she will be eligible for the saver’s credit. These provisions apply for tax years beginning after December 31, 2017 and before January 1, 2026.
Further, the Act 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 (rollovers would offset other contributions made to the ABLE account for the year). Amounts rolled over in excess of the limitation are included in the distributee’s gross income. These rules are effective for rollovers that occur after December 31, 2017 and before January 1, 2026.
Taken together, the changes in the tax reform package can provide entirely new strategies for planning for all levels of education, particularly for clients who are supporting a child who has a disability and will face an unknown amount of medical costs in the future.
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Robert Bloink’s insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality-based exposures. Bloink, a professor at Texas A&M University School of Law, is working with William Byrnes, the associate dean of the law school, on development of executive programs for insurance underwriters, wealth managers and financial planners. Previously, Bloink served as senior attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division.
William Byrnes is the leader of National Underwriter’s Financial Advisory Publications, having been appointed in 2010. He is a professor and an associate dean of Texas A&M University School of Law. His National Underwriter publications include Tax Facts, Advanced Markets, and Sales Essentials. Byrnes held senior positions of international tax for Coopers & Lybrand and has been commissioned and consulted by a number of governments on their tax and fiscal policy.