529 Plans and ABLE Accounts
Achieving a Better Life Experience (ABLE) Act in 2014 established special accounts for a designated beneficiary’s care of disability expenses. This allowed states to create tax-advantaged savings programs for eligible people with disabilities. Funds from these accounts helped pay for qualified disability expenses and made tax free if used for those purposes. SEC 529 Plans are plans operated by the state or an educational institution. They were designed to make it easier to save for college, other post-secondary training, or tuition. The benefits were connected to the enrollment or attendance at an elementary, secondary, private, or religious school for a designated beneficiary such as child or grandchild. These plans can be rolled over and any unused portions are recontributed to qualified ABLE accounts of the same designated beneficiaries.
New TCJA Changes
Under Tax Cuts and Jobs Act in regards to beneficiary recipients of 529 Plans and ABLE Accounts:
1. Contribution amounts allowed to ABLE accounts increased with special rules added for contribution limits.
2. Designated beneficiaries can claim the Saver’s Credit for those contributions.
3. Rollovers allowed for qualified 529 tuition plans to ABLE accounts of same designated beneficiary or his/her family.
4. Annual limit increased to $15,000 (gift tax exclusion amount for tax year 2018).
5. If designated beneficiary works, may contribute his or her compensation up to poverty line amount for a one-person household.
6. Beneficiary CANNOT contribute additional amounts if his/her employer made contributions for him/her to a:
a. 401 (a) defined plan or 403 (a) annuity contract
b. 403 (b) annuity contract
c. 457 (b) eligible deferred plan
Effects Of These Changes
Additionally, PATH Act added special rules for student beneficiaries receiving refund tuition or other qualified education expenses. A student dropping a class mid-semester can recontribute the unused portion to ANY of his/her qualified SEC 529 Plans within sixty days. This makes the refund tax free and will not count against the plan’s contribution limit. Department of Treasury and IRS plan future regulations simplifying tax treatment of the transactions for these plans.
SEC 529 Plans can pay for K-12 education up to a total of $10K for education expenses. This can be any elementary, secondary, private, and/or religious school of a beneficiary’s choosing. Designated beneficiaries rolling over SEC 529 Plans to qualified ABLE Accounts for same beneficiary are allowed under TCJA. Its regulations provide that rollovers from 529 Plans together with contributions made, other than permitted beneficiary compensation, not exceed the annual limit of $15K for tax year 2018.
Further details on SEC 529 Plans and ABLE Accounts as well as TCJA changes can be found on the IRS website at https://www.irs.gov/forms-pubs/about-publication-907