January 1, 2018 – Congress has passed legislation, signed into law by President Trump on December 22, 2017, which makes important changes affecting Section 529 accounts, including NextGen.
For distributions after December 31, 2017, “qualified higher education expenses” also includes expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. As always, the earnings portion of a distribution from a Section 529 account is federally tax free if made for a “qualified higher education expense”.
However, distributions for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school are limited to $10,000 in a tax year, for any single beneficiary across all Section 529 plans for such beneficiary. It is incumbent upon account owners to monitor such withdrawals, and coordinate such withdrawals with other account owners for the same beneficiary, in order not to exceed the $10,000 per beneficiary annual limit.
In addition, beginning on December 22, 2017 the federal legislation permits Section 529 account owners to effect a rollover of 529 account assets for a designated beneficiary to an “ABLE” account for the same beneficiary or a beneficiary who is a member of the family (as defined in the Internal Revenue Code) of the 529 account beneficiary. Again, it is incumbent upon account owners to monitor rollover contributions to ABLE accounts, and coordinate all contributions, including rollovers, with other contributors, in order not to exceed the annual limitation for contributions to ABLE accounts per beneficiary, which is currently $15,000 for tax year 2018. The provision for permitted rollovers from Section 529 plans to ABLE plans is set to expire on December 31, 2025.
Maine taxpayers should be aware that Maine law currently provides that the earnings portion of a withdrawal is tax free if it is used for “higher education expenses”. Higher education expenses under Maine law is defined as “expenses for attendance at an institution of higher education as those expenses are defined by rule of the [Finance Authority of Maine] consistent with applicable provisions of the Internal Revenue Code and its regulations addressing qualified state tuition programs.” Although the recent federal legislative changes include the elementary and secondary education expenses noted above in the definition of “qualified higher education expenses”, thus exempting the earnings portion of withdrawals for such a purpose from federal taxation, it is not clear whether such favorable tax treatment will apply under Maine law. The matter is expected to be taken up by the Maine Legislature for clarification in 2018.
Finally, owners of NextGen accounts which have been awarded Maine matching grants, or eligible for Maine matching grants, should be aware that matching grants may only be withdrawn for payment to institutions of higher education. That is not expected to change.