IRS releases early guidance on new uses, options for 529s
The latest IRS regulations on three recent tax law changes affecting 529 education savings plans highlight tuition refunds, expanded rules for use, and rollovers.
Notice 2018-58 addresses a change in the PATH Act and two changes in the Tax Cuts and Jobs Act. Taxpayers, beneficiaries and administrators of 529 and ABLE programs can rely on the rules in this notice until the Treasury Department and IRS issue regulations clarifying these three changes.
- Tuition refunds: The PATH Act change added a special rule for a beneficiary of a 529, usually a student, who receives a refund of tuition or other qualified education expenses (this can occur when a student drops a class mid-semester). If the beneficiary recontributes the refund to any of their 529 plans within 60 days, the refund is tax-free. The Treasury Department and the IRS intend to issue future regulations simplifying the tax treatment of these transactions. Re-contributions would not count against the plan’s contribution limit.
- K-12 education: A TCJA change allows distributions from 529s to be used to pay up to $10,000 of tuition per beneficiary (regardless of the number of contributing plans) each year at an elementary or secondary public, private or religious school of the beneficiary’s choosing.
- Rollovers to an ABLE: Another TCJA change allows funds to be rolled over from a designated beneficiary’s 529 to an ABLE account for the same beneficiary or a family member. ABLE accounts are tax-favored accounts for certain people who become disabled before age 26, designed to enable these people and their families to save and pay for disability-related expenses. The regulations would provide that rollovers from 529s, together with contributions to the designated beneficiary’s ABLE account (other than certain permitted contributions of the designated beneficiary’s compensation) cannot exceed the annual ABLE contribution limit, which is $15,000 for 2018.