How could tax reform impact your college savings?

What you need to know about tax reform and education savings plans

How could tax reform impact your college savings?

Jon VoglerTime to read: 2 min

The tax reform process has drawn national attention for its proposed corporate and individual tax cuts, as well as the potential deduction and rule changes intended to raise revenue to at least partially offset them. We recently touched on the retirement-related effects of these proposed revisions. Now, let’s consider the possible effects of tax reform changes on education savings plans.

The tax reform bill passed by the House of Representatives on Nov. 16 would make changes to both 529 plans and Coverdell accounts. The tax reform bill from the Senate, which was passed by the Senate Finance Committee on Nov. 16, but has not been brought before the full Senate for a vote as of this writing, would also revise 529 plans. Let’s explore the key implications on both types of savings plans.

529 plans

Current law provides that under a qualified tuition program (i.e., a 529 plan), an individual may fund higher education expenses by either prepaying tuition or contributing to an account. Although there is no deduction for payments or contributions when made, distributions are tax-free when used for qualified higher education expenses, including tuition, fees, books, supplies and equipment, and (some) room and board, paid to any eligible institution.

Under the House bill, $10,000 of 529 plan savings per year of elementary or high school expenses would be considered qualified, as well as the costs of apprenticeship programs.

What’s more, you currently need a birthdate and Social Security number to name a 529 plan beneficiary. As a result, an expecting parent will sometimes get a head start on college savings by naming himself or herself as the beneficiary. Later, they can name any qualifying family member (including the child) as the new beneficiary without tax consequences. While the House bill specifies that 529 plan contributions would be allowed for an unborn child (in utero), the Senate bill makes clear that an unborn child may be treated as a designated 529 plan beneficiary with respect to contributions made after 2017, so there would be no need to name a parent as the beneficiary in this situation.

Under both the House and Senate bills, a 529 account could be rolled over to an Achieving a Better Life Experience (ABLE) account1 of the 529 account’s designated beneficiary or a family member of the 529 account’s designated beneficiary.

Coverdell accounts

Current law provides for Coverdell Education Savings Accounts to save for qualified elementary, secondary and higher education expenses. Coverdell account contributions are not deductible and generally may not exceed $2,000 per beneficiary annually. Additionally, they may not be made after the designated beneficiary reaches age 18. The House bill would prohibit new contributions to Coverdell accounts after 2017, except for rollover contributions. The bill would, however, allow tax-free rollovers from Coverdell accounts to 529 plans.

The House bill will need to be reconciled with the Senate bill once the latter is approved by the entire Senate. For now, we’ll simply have to wait and see how education savings accounts will be treated in any final tax reform legislation adopted by Congress and signed by the president.

We’ll keep you posted.

1 Tax-favored ABLE accounts are designed to enable individuals with disabilities to save for and pay for disability-related expenses.

Important information

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Thomas Rowley

Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

Mr. Rowley has been director of retirement business strategy since 2010. Prior to joining Invesco in 2010, he was in charge of individual retirement plan products and Retirement Marketing at Van Kampen.

Prior to joining Van Kampen in 1996, he was a 401(k) regional sales director with an investment firm. His experience also includes seven years in retirement plan operations and three years as head of a brokerage firm’s retirement help desk. He began his career in the Treasury bond futures pit at the Chicago Board of Trade.

Jon Vogler
Senior Analyst
Retirement Research, Invesco Consulting

Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.

Prior to joining Invesco in 2008, Jon spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.

Jon earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He has a B.A. in History from Rutgers, The State University of New Jersey.

 

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