The long-awaited House tax reform plan, “The Tax Cut and Jobs Act”, was released in draft form last week and much has been written about changing individual tax brackets, corporate tax rates, federal estate taxes, tax on college endowments, among many other changes large and small.
Comparatively little has been mentioned about the proposed effects on college savings plans, a major source of tax-planning for families looking to better shoulder the enormous burden of higher education.
Here are 3 proposed changes and possible impacts:
- Coverdell ESA Accounts
The GOP tax plan would end all contributions to Coverdell ESAs after December 31, 2017, but would allow tax-free rollovers into 529 plans.
Coverdell ESAs are a more archaic college savings vehicle, and never had enough annual savings to serve as the lion’s share of a family’s college savings plan. This is a good opportunity for consolidation of these funds, but for unattended accounts, a forced move may result in poor decisions. For those that have a 529 but are unhappy with it, this can be an additional spur to research the best options for state 529 platforms.
Be careful! Current rules permit only one tax-free rollover of a 529 within 12 months. This rule covers any 529 plan with the same beneficiary, so a child with 529s for both parents and grandparents should be extra cautious.
- Expanding Qualified Expenses for 529 Plans
If the GOP provisions were to pass, $10,000 of 529 plan savings per year are qualified for tuition relating to enrollment or attendance at a public, private, or religious elementary or secondary school. Qualified Higher Education Expenses have also expanded to include qualified apprenticeship programs.
For families who send their children to private high-school, this can be an extra source of funding if you have already begun saving into a 529. This may offer a limited benefit, as only investment gains have tax benefit under the current 529 platform, and the time horizon from birth to high-school is relatively short for significant return. Parents expecting to pay out of pocket for primary school may want to consider front-loading funding to maximize investment time frame.
- 529 plan Beneficiary Changes
The proposed tax bill would allow an unborn child (in utero) to be named as a 529 plan beneficiary.
Currently you need a name and social security number – typically people that are expecting a baby can open a 529 plan with the parent as the beneficiary and then change the beneficiary after the child is born.
For more information, or if you have any questions, please do not hesitate to contact your AEPG® Financial Life Planner.
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