The Internal Revenue Service and the Treasury Department recently announced they will issue new regulations for 529 educational savings plans. These changes come on the heels of tax law changes last year that affected the 529 vehicle.
The new regulations were outlined in Notice 2018-58. One change refines the recent changes made to 529s that allow tuition refunds to be tax-free. Another change in the law allows investors to use 529 funds for K-12 education expenses. And a third allows investors to roll over 529 funds into ABLE accounts (this type of account, which stands for Achieving a Better Life Experience, is a savings vehicle that helps those with disabilities pay for their expenses).
A 529 is a tax-advantaged investment vehicle designed specifically for families saving for college. The education savings plan originated in 1996 under the Small Business Job Protection Act. In 2017, the Tax Cuts and Jobs Act allowed families to pay up to $10,000 a year for elementary or secondary public, private or parochial educational expenses.
The IRS wants to limit the new law’s rollover for ABLE accounts, in addition to other contributions, to $15,000 for 2018. As for the use of 529s for K-12, the IRS plans to issue regulations saying that distributions from any and all qualified tuition plans used to pay for expenses must not exceed $10,000. The new regulations also say that the term “elementary or secondary” must be defined by the law in each state.
The Protecting Americans from Tax Hikes (PATH) Act in 2015 prevented tuition refunds and other education-related refunds from being taxed if the refund was contributed back to the 529 or ABLE account within 60 days. Now the IRS wants to also allow the recontribution “to not count against the plan’s contribution limit” and for the recontribution to be treated as principal since plan administrators would have no knowledge of which portion is from earnings and which is from the principal.