GOP bill would eliminate Coverdell ESAs and make 529s more flexible

http://www.savingforcollege.com/articles/gop-bill-would-eliminate-coverdell-esas-and-make-529s-more-flexible

House Republicans revealed their long-awaited tax reform plan today, the Tax Cuts and Jobs Act, which includes provisions to education savings benefits. We want to remind families as you read through the media coverage that this plan is simply a proposal, and may not pass in its entirety. However, it’s important to understand how these proposed changes could affect your college savings strategy. Here are some of the key issues that we feel could affect our readers:

Coverdell Education Savings Accounts (ESAs)

Currently, Coverdell ESAs offer tax-free investment growth when used to pay for qualified K-12 or higher education expenses. These accounts come with limitations - Individuals earning less than $110,000 (or $220,000 for married couples filing jointly) may contribute up to $2,000 per beneficiary per year, and only up until the beneficiary turns 18.

The GOP tax plan would end all contributions to Coverdell ESAs after 2017, but would allow tax-free rollovers into 529 plans.

529 plan qualified expenses

Investments in 529 plans grow tax-free, and are not taxed when used to pay for qualified higher education expenses. This includes tuition, fees, books, supplies and equipment and (some) room and board paid to any eligible institution. The earnings portion of non-qualified 529 withdrawals are subject to income tax as well as a 10% penalty.

If the GOP provisions were to pass, $10,000 of 529 plan savings per year of private elementary or high school expenses would be considered qualified, as well as costs of apprenticeship programs.

529 plan beneficiaries

All 529 plans have an account owner and a beneficiary. To name a 529 plan beneficiary, you need their birthdate and social security number. But sometimes, expecting parents want to get a head start on college savings for their baby-to-be. If this is the case, we typically suggest opening the account and naming a parent as the beneficiary. Once the baby is born and has a social security number, you can change the beneficiary. 529 plan beneficiaries can be changed to any qualifying family member (mother, father, sister, brother, aunt, uncle, spouse, son or daughter) without tax consequences.

The proposed tax bill would allow an unborn child (in utero) to be named as a 529 plan beneficiary, so there would be no need to name a parent.

With over three million visitors each year, Savingforcollege.com is committed to providing the most accurate and objective information when it comes to saving and paying for higher education. We will continue to keep our readers informed on current and upcoming legislation as it relates to our industry.