529 Plan Distribution Changes under the New Tax Law
One of the overlooked provisions of the Tax Cuts and Jobs Act (TCJA) relates to qualifying 529 plan distributions. Effective for distributions made after 12/31/17, qualifying distributions can also be made for public, private or religious elementary or secondary school within limitations described below.
By way of background, qualified tuition programs (529 plans) have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is no income limit for contributors. Under prior law, 529 plan distributions have been tax-free (including income earned in the account) as long as they are used to pay qualified higher education expenses (college) for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as a higher education expense.
The new law under TCJA expands qualified distributions made after 12/31/17. Plan participants may withdraw not more than $10,000 in expenses for tuition incurred during the tax year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Any excess distributions received by the individual are treated as distributions subject to tax under the general rules of Section 529.
We will continue to follow this new provision as additional guidance becomes available.