The new Tax Cuts and Jobs Act brings welcome changes for families with young children, and children with disabilities.
First, 529 plans can now be used to pay for K-12 tuition. Traditionally, 529 plans were used only for higher education expenses. Where families relied upon the Coverdell Education Savings Accounts to help pay for K-12 tuition, they can now use funds in a 529 plan without penalty. Coverdell ESAs have several restrictions. For example, with a Coverdell ESA you cannot make more than $110,000 a year, cannot contribute more than $2,000 per year per beneficiary, contributions must be made before the beneficiary turns 18, and funds must be spent by the time the beneficiary reaches 30 years of age, unless the beneficiary is disabled. None of these restrictions are required by 529 plans.
Under the new tax law, up to $10,000 per year from a 529 plan can be used for K-12 tuition. This helps families choosing private or religious schools, and in some states might help pay for homeschooling expenses.
Second, and most importantly in my opinion, is that 529 plans can be rolled into ABLE accounts. ABLE accounts permit people with disabilities to save money without jeopardizing government benefits like Medicaid and SSI. ABLE is short for “Achieving a Better Life Experience,” an appropriate name for a program that encourages people with disabilities to work and save money, instead of having to choose between that, or receiving benefits that will be jeopardized once you accumulate more than $2,000 in the bank. With an ABLE account, you can save up to $15,000 a year.
The ability to roll 529 plans into ABLE accounts is important because if parents have put money into 529 plans for their children, and a child later becomes disabled, the money in the 529 can be rolled into an ABLE account without penalty. Before the new tax law, if the 529 beneficiary became disabled, withdrawing 529 plan funds to put into an ABLE account would create income tax and would trigger a 10% withdrawal penalty.
If you want to discuss these options for your children, email me at firstname.lastname@example.org.