1. 2020 Contribution Limits

Contributions to a Section 529 plan are limited by the maximum lifetime limits of a plan and the annual gift tax exclusion amount—meaning that clients can contribute up to $15,000 per year in 2020 without a gift tax liability if no other contribution is made to the beneficiary. 529 plans also offer the chance to bundle contributions – allowing for a $75,000 contribution in one year rather than over a five-year period for gift tax purposes. (Photo: Shutterstock)

2. Taxation Upon Distribution

A 529 plan is funded with after-tax dollars that are permitted to grow on a tax-free basis (and function much like a Roth IRA), so that distributions from the account are not taxed when received so long as they are used to pay for qualified higher education expenses. Nonqualified distributions—those not used to pay for qualified education expenses—are included in gross income, but only to the extent that the distribution represents earnings on amounts that were contributed. (Photo: Shutterstock)

3. What Exactly Is a “Qualified Education Expense”?

Qualified education expenses include the cost of tuition itself, as well as the cost of fees, books, supplies and equipment that is required for the plan beneficiary’s enrollment at an eligible education institution, as well as reasonable costs for room and board. Qualified expenses also include costs related to special needs services incurred in connection with a special needs beneficiary’s enrollment or attendance at an educational institution. (Photo: Shutterstock)

4. Using 529 Plans for Elementary and Secondary School Expenses

In addition to the typical use of 529 plan funds to finance expenses related to a beneficiary’s college education, the 2017 tax reform legislation expanded 529 plans to permit the use of up to $10,000 per year for elementary or secondary school expenses. The expansion of 529 plans to include elementary and secondary school expenses means that some clients may wish to open a second 529 plan in order to pay for K-12 school expenses.

However, the $10,000 amount applies on a per-student basis (rather than a per-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). (Photo: Shutterstock)

5. Secure Act Changes for Student Loans and Apprenticeships

New for 2020 under the Secure Act, up to $10,000 in 529 plans can be used to repay the designated plan beneficiary’s student loans. Additionally, up to $10,000 in expenses associated with the beneficiary’s participation in registered apprenticeship programs can be treated as qualified education expenses. These changes apply retroactively, for tax years beginning after December 31, 2018. (Photo: Shutterstock)

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6. Multiple Children and 529 Plans

Clients are permitted to fund multiple 529 plans for different children or beneficiaries without incurring gift tax consequences, as long as the annual contribution for any particular beneficiary does not exceed the annual contribution limit ($15,000 in 2020). The client is also permitted to change the original account beneficiary—for example, if one child chooses not to attend college, those funds could be used for another child. Additionally, under the Secure Act plan funds can be used to pay for the students loans of a beneficiary or the beneficiary’s siblings. (Photo: Shutterstock)

7. How Do Tax Credits Impact Taxation of 529 Plan Distributions?

The student may use 529 plan funds and still qualify for education-related credits such as the American Opportunity or Lifetime Learning tax credits, so long as the same amounts are not used to cover the same qualified education expenses. Students are also required to reduce the total amount of their “qualified education expenses” by certain scholarships that they receive. (Photo: Shutterstock)

8. Contribution Deadlines for 529 Plans

The rules governing contribution deadlines vary by state. Some states impose a strict December 31 deadline—meaning that the funds must be received and deposited into the account by December 31, 2020, to qualify as a contribution for the 2020 tax year. In some states, the contribution need only be postmarked by December 31, 2020, to qualify as a 2020 contribution. Other states may allow contributions to count for 2020 if they are deposited by the April 15, 2021, tax filing deadline. (Photo: Shutterstock)

9. 529 Plans and ABLE Accounts

The 2017 tax reform legislation amended the previously existing provisions to allow 529 plan funds to be rolled over into an ABLE account for the designated beneficiary or the designated beneficiary’s family member. ABLE account rules are similar to those governing 529 plans, but the funds receive tax-preferred treatment upon distribution because they are used for the benefit of a disabled individual.

These rollovers are permitted in an amount up to the annual 529 plan contribution limit. Amounts rolled over in excess of the limitation are included in the distributee’s gross income upon distribution. This new rule is temporary, however, and is currently only effective for rollovers that occur after December 31, 2017, and before January 1, 2026. (Photo: Shutterstock)

10. New Funding Strategies to Consider Post-2017 Tax Reform

For tax years beginning after 2017 and ending before 2026, the 2017 tax reform legislation doubled the value of the child tax credit, increasing its total value from $1,000 to $2,000 per child under age 17 (i.e., a married couple with two children under 17 may receive an extra $2,000 per year, assuming they do not cross the income thresholds). The child tax credit now begins to phase out only when the client’s adjusted gross income reaches $400,000 (for joint returns) or $200,000 (for all other filers). This is a substantial increase from the previously applicable income restrictions. (Photo: Shutterstock)

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IRC Section 529 plans are a valuable way to save funds for a child’s college or other education expenses, but the fact remains that many clients don’t fully understand the rules that apply to these types of accounts. The issue is compounded by the changes made to the 529 plan rules under the 2017 tax reform bill and the recently passed Secure Act. Here are the top 10 things that clients need to know about funding a 529 plan in 2020.