Take cash from 529 plan early


Thanks to a provision in the Tax Cuts and Jobs Act, parents of younger kids can use a tax favored technique previously reserved for college students.

Here is the strategy: Tap into a Section 529 plan to pay pre-college tuition. The TCJA expands the special tax exemption for such plans for children in kindergarten through grade 12.  This unique tax break went into effect in 2018.

A 529 plan is an educational savings plan, operated by a state, that was initially only allowed to pay for qualified college expenses. As long as certain requirements are met, there’s no federal income tax on the accumulation of earnings within the plan, plus qualified distributions are exempt from tax.  If the child completes school, decides not to enter college or leaves early, you can roll over the plan balance tax-free to cover a different beneficiary.  Thus, a 529 plan can continue indefinitely.  Similarly, you can roll over amounts from a 529 plan to an Achieving a Better Life Experience  Account for a disabled individual. Under the TCJA, there’s no tax on the transfer to an ABLE account set up for the designated beneficiary or a relative.  The list of qualified higher education expenses for Section 529 plans includes:
• Tuition and fees;
• Books;
• Supplies;
• Equipment; and
• Reasonable costs for qualified room and board.
Here is the key point: Under the TCJA, the exemption for distributions used for qualified expenses is expanded to include tuition payments to an elementary or secondary public, private or religious school.  There is, however, a limit. The amount of the tuition for a single beneficiary can’t exceed $10,000 for the year.  Finally, be aware that amounts contributed to a Section 529 account are sheltered from gift tax by the annual gift tax exclusion. For 2022, you can give up to $16,000 a year, or $32,000 for joint gifts made by a married couple, to an account benefitting a youngster without any gift tax consequences.  Here is the icing on the cake: You can load up on 529 plan contributions in the first year. The tax law allows you to give the equivalent of five years’ worth of annual exclusion amounts upfront with no gift tax consequences.  The gift is treated as if it were spread out over the five-year period.[/vc_column_text][us_image image=”3469″][/vc_column][/vc_row]