New Rules Benefit 529 College Plans as Estate Planning Tool

The Tax Cuts and Jobs Act includes a provision to allow 529 Plans to be used for private elementary and high school expenses, rather than just college related expenses. Please note however that not all States have  adopted the Federal tax code change so you will need to check with your State’s plan prior to using funds for private elementary expenses. The new rules are potentially a boon for both parents and grandparents looking for a better way to pay for private educational costs. Until now, the only plan that allowed for tax-free earnings growth was a Coverdell Education Savings Account (ESA). Limitations on contributions and income have made these plans more unfavorable for many families.

One notable benefit to a 529 versus a Coverdell ESA includes transferability. Funds in a 529 account may be transferred from the original beneficiary to another. Another benefit is that funds in a 529 may grow perpetually, and never have to be used. Some families are opting to use this feature as an estate planning tool, allowing unused funds in a 529 to pass along to future recipients. The new tax plan does limit the amount for K-12 payments to $10,000 per year per student. Any funds held in an existing Coverdell ESA account may be rolled over into a 529 plan with no tax consequences.

Below are the new benefits to a 529 Plan versus a traditional Coverdell ESA plan:

These plans offer two primary benefits: assets grow tax deferred and tax free withdrawals for qualified expenses. Contributions made by parents and grandparents are considered a gift, thus providing a tax benefit for some contributors.

Named after the IRS Code it falls under, Section 529 plans have ballooned to $282 billion in assets (as of the 3rd quarter of 2017) since their inception in 1997. Section 529 plans were initially intended to provide parents of young children the ability to invest money for future anticipated college related expenses.

We encourage you to discuss the finer details of this new tax legislation and how it will impact you and your family with your tax advisor. And as always, please rely upon your Madison team as an additional resource.

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2018