Think Advisor’s recent article, “Investing in 529, ABLE Plans? Better Check Tax Law Changes,” says that the tax reform passed at the end of 2017 made important changes to educational 529 and 529 ABLE plans. The 2017 Tax Act expanded Section 529 plans, to include the use of up to $10,000 per year for elementary or secondary school expenses.
The new law will also let Section 529 plan funds 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. (These rollovers would offset other contributions made to the ABLE account for the year.) Any amounts rolled over in excess of the limitation are included in the distributee’s gross income when they’re distributed. These rules are effective for rollovers that happen after December 31, 2017 and before January 1, 2026.
The new rules for elementary and secondary school expenses could mean that some people may want to open a second Section 529 plan for K-12 school expenses. However, the $10,000 amount applies on a per-student basis and not a per-Section 529 account basis. Therefore, if the student is a beneficiary of several accounts, he or she can only receive a maximum of $10,000 from all accounts. Anything over the $10,000 will be taxable.
ABLE accounts also underwent some significant changes with the 2017 Tax Act. The new law expanded ABLE account contribution rules, so that the account beneficiary can now contribute his or her earned income, even if the contribution (when added to other contributions) results in the contribution levels going over 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 her income or the federal single-person poverty limit. However, this additional contribution limit isn’t available 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, she’ll be eligible for the saver’s credit. This applies for tax years beginning after December 31, 2017 and before January 1, 2026.
Reference: Think Advisor (April 17, 2018) “Investing in 529, ABLE Plans? Better Check Tax Law Changes”