Recap on Tax Law Changes to 529 plans
Recent federal and state laws have added flexibility to Section 529 savings plans. For background, 529 plans are tax-advantaged savings plans created for a beneficiary, usually a child. When the beneficiary goes to college, he or she can withdraw those funds for qualified education expenses. If funds are used in another way or refunded expenses are not recontributed in 60 days, then taxes and penalties apply. We have put together the following recap of recent developments in case you missed something that could be helpful to you and your family.
Using 529 plans for K-12 education. Qualified education expenses were limited to college or vocational students, but federal law now allows up to $10,000/year to be withdrawn from 529 plans for K-12 private school tuition. K-12 tuition does not include school supplies, even if sold by the school. This change has no impact on those who are attending public school or are home-schooled. Before taking distributions, keep in mind that redirecting money from college savings into kindergarten tuition negates much of the long-term growth capabilities of 529 accounts.
Louisiana adapts to federal change. LA START, the college 529 plan sponsored by Louisiana, is not incorporating this change directly. Instead, Louisiana is creating a parallel program called START K12. Deposits to START K12 will not be deductible on your state tax return or earn matching funds like the college START plans. Withdrawals from START K12 will not be available until 2019, so the state is allowing up to $10,000 to be withdrawn from college START plans out of existing balances during 2018 only. Beginning in 2019, K-12 tuition withdrawal must come out of the new START K12 plans.
ABLE accounts. ABLE accounts are similar to 529 plans, however they benefit those specifically with physical or mental disabilities. These accounts provide a valuable way for families to save for the lifetime costs of caring for disabled children. Recent tax legislation now allows funds to be rolled over from an existing 529 plan to an ABLE plan. This may be particularly helpful if a child incurs a disability after the 529 plan was established. The rollover from the 529 plan plus any other contributions made to the beneficiaries account cannot exceed the annual contribution limit of $15,000 for 2018.
If you have any questions, please contact our office at (225) 927-6811.