Here is a high level overview of each policy change and the corresponding benefits to 529 plan owners and their beneficiaries.
- PATH Act 2015: Tax-free/penalty-free recontribution of refunds to 529 plans.
- Tax Cuts and Jobs Act 2017: 529 funds can be spent on K-12 tuition up to an annual allowance of $10,000.
- SECURE Act 2019: 529 funds can be spent on student loan repayments up to a lifetime allowance of $10,000 and on apprenticeship programs (trade school & vocational programs).
- SECURE Act 2.0: Beginning in 2024, 529 plan owners can make tax and penalty-free rollovers from the 529 plan to the beneficiary’s Roth IRA.
Policy Changes and 529 Plan Implications
Now, let’s take a closer look at each policy’s 529 plan implications.
Protecting Americans from Tax Hikes (PATH) Act - 2015
The PATH Act of 2015 allows for the refund of payments made to colleges from 529 plans to be recontributed to a 529 plan account owner or beneficiary. Due to COVID-19, many colleges have begun refunding room and board, tuition, and other fees, and this law is proving to be extremely beneficial.
- Recontributing a Refund to a 529 Plan: Here are some important points to consider.
- No taxes or penalties are paid if the recontribution is within 60 days of the date of the refund. If not, refunds will be considered non-qualified distributions and are subject to income taxes at the beneficiary’s rate and a 10% penalty.
- Recontributions are not counted against the beneficiary’s overall plan contribution limits, which typically range from $235,000 to $529,000 depending on state laws.
- If any part of the refund is for non-qualified education expenses, any recontribution to the 529 plan would be treated as a new contribution subject to the annual gift limit of $16,000 for 2022 and overall plan contribution limits.
- The entire recontribution is treated as principal as opposed to a mix of principal and interest.
- The amount recontributed to the 529 plan cannot exceed the amount of the refund.
- Refunds must be recontributed to a 529 plan for the same beneficiary, but does not need to be recontributed to the same 529 plan account from which it was distributed.
- Refunds may be directed toward other qualified higher education expenses in the same tax year. For example, a refund of room and board expenses can be used toward buying a computer or paying for internet, since many colleges are moving classes online.
- Coupon refunds (vouchers or credits) from educational institutions are not considered cash refunds. Therefore, coupon refunds cannot be recontributed to a 529 plan and do not cause the associated 529 plan distribution to become non-qualified.
- Remember to take the following steps to ensure the recontribution is not treated as a regular contribution, which may result in the original withdrawal being treated as a non-qualified withdrawal by the IRS.
- The account owner must keep track of all the records showing the date of the refund from the eligible educational institution and then its recontribution into the 529 plan.
- It is important to notify the 529 plan administrator regarding the recontribution of previously withdrawn funds and to confirm that the refunded amount is compliant with the 60-day deadline.
- Consider verification of whether you need to detail the account number of the 529 account from which the withdrawal was initiated, along with the date and amount of the withdrawal.
Tax Cuts and Jobs Act (TCJA) - 2017
- Allowance for K-12 education expenses: 529 plans can be used to pay for up to $10,000 of annual tuition expenses to attend public, private, or religious elementary and secondary schools. This annual allowance is per student and not per account.
Setting Every Community Up for Retirement Enhancement (Secure) Act - 2019
The SECURE Act is intended to encourage better savings habits and help Americans achieve financial security. Here are the key changes to 529 plans.
- Student Loan Repayments: 529 plan holders with any remaining 529 balance can make tax-free withdrawals towards student loan repayments for themselves, their siblings, children, grandchildren, or spouses. However, there is an aggregate lifetime limit of $10,000 in qualified student loan repayments per plan beneficiary and another $10,000 for each of the beneficiary’s siblings. For instance, a family with two children can take out a maximum of $20,000 to pay down student loans. Since there are no age or time limits imposed on 529 plan contributions, students, parents, or grandparents may continue contributing to a plan during and/or after college, and then use any remaining 529 plan funds to repay their student loans. The portion of student loan interest that is paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction when filing your income taxes.
- Apprenticeship Program Expenses: Tax-free withdrawals can be made from 529 plans for expenses related to trade schools or vocational programs registered with the federal Department of Labor. These programs typically combine on-the-job training with classroom instruction and are less costly compared to traditional colleges. This new law may relieve some families’ concerns about funding a 529 plan if their child decides not to attend a traditional college.
Setting Every Community Up For Retirement Enhancement (SECURE) Act 2.0 – 2022
The SECURE Act 2.0, passed in 2022, added provisions to the original SECURE Act with the same goal of expanding access to retirement plans and encouraging their adoption.
- 529 rollovers to Roth IRAs: Beginning in 2024, 529 plan owners can make tax and penalty-free rollovers from the 529 plan to the beneficiary’s Roth IRA. However, there are some caveats to be aware of:
- The Roth IRA accepting 529 funds must be in the same name as the 529 plan beneficiary.
- The 529 plan must have the same beneficiary for at least 15 years.
- Rollovers from the 529 plan to the beneficiary’s Roth IRA are subject to annual Roth IRA contribution limits and a lifetime limit of $35,000.
- 529 contributions or earnings from the past five years cannot be rolled over to a Roth IRA.
Know Your 529 Plan's State Laws
While these acts made changes to federal laws, it is important to understand your state’s interpretation of these new laws to avoid any issues that may arise by incorrectly timing a distribution and inadvertently incurring any state-level taxes
and penalties. Your Janney Financial Advisor can help you understand how the changes to 529 plan policies can help you and your family reach your education planning goals.
Working With Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
The examples provided are all hypothetical and do not take into account any specific situations. The hypothetical examples are provided to help illustrate the concepts discussed throughout and do not consider the effect of fees, expenses, or other costs that will effect investing outcomes. Any actual performance results will differ from the hypothetical situations illustrated here. Please consult a professional to help you evaluate your situation before implementing any of the strategies discussed here.
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