insight magazine

Cashing in With Tax Reform

Tax law changes make early saving for education expenses all the more enticing. By MARK GILBERT, CPA, PFS | Spring 2018


Among the many savings and investment vehicles students and parents can use to finance education expenses — think Coverdell Education Savings Accounts, Roth IRAs, and U.S. savings bonds — the most popular plans just got a shot in the arm thanks to tax reform.

Around since 1996, 529 plans, or “qualified tuition plans,” are tax-advantaged savings plans sponsored by states, state agencies, or educational institutions, and authorized by Section 529 of the Internal Revenue Code, to encourage education saving.

The Tax Cuts and Jobs Act of 2017 introduced some important changes to 529 plans that should only further their popularity. Here are the highlights — and some practical ideas for implementation and use.


529 plans come in two types: (1) prepaid college tuition savings plans, and (2) defined contribution-type account balance plans, which are funded with “after-tax” contributions. 529 plan contributions grow on a tax-free basis, much like in a Roth IRA, and withdrawals remain tax-free if used for qualified education expenses.

Previously, “qualified education expenses” meant only certain college-related expenses. Now, the law permits up to $10,000 per year of tax-free withdrawals from 529 account balance plans to cover tuition and fees of public and private elementary and secondary schools.

This is a dramatic expansion, which allows 529 account balance plans to essentially replicate or replace Coverdell Education Savings Accounts (ESAs). While annual contributions to Coverdell ESAs are limited to $2,000 per child, annual 529 plan contributions max out at the gift exclusion amount of $15,000 per donor per child, or $75,000 if “front loading” five years’ worth of contributions, a prudent estate planning strategy often used by grandparents.

It’s my hope that the expanded use of 529 account balance plans will encourage families to start saving earlier in a child’s life. With education costs continuing to rise, the more time allowed for contributions to grow prior to withdrawal, the better.

I generally recommend funding 529 plans for college to cover about 66 percent of the anticipated total expense, with the remaining 33 percent coming from other savings, investments, current cash flow, and scholarships or financial aid. For families wishing to send children to private elementary or secondary schools, I believe funding a 529 plan account to cover 100 percent of the qualified costs is best because the availability of scholarships and financial aid is more limited. Additionally, any unused 529 plan funds can be used for college or another child’s education.

How should 529 plan funds be invested? As you would with your retirement savings, you must consider risk tolerance and time until funds will be withdrawn to form a reasonable investment strategy. While each family’s situation is unique, I often recommend an age-based methodology: the youngest child’s account is invested heavily in equities while the oldest child’s account is invested more in bonds and cash. When investing for elementary and secondary school, the same philosophy holds — the shorter time frame until need means these accounts should be in fewer equities and more in stable income vehicles. I also recommend setting up separate accounts for each child’s college, elementary, or secondary education expenses to better manage the funding goals.


Thanks to the new tax law’s 529 plan expansion, Coverdell ESAs are essentially obsolete. In fact, lawmakers have ruled 529 plans to be the superior education savings vehicle and have eliminated the option of new Coverdell ESAs. Why would they do this? First, as noted earlier, 529 plans benefit from having higher contribution limits. Second, there’s no age limit on disbursing 529 plan funds, whereas Coverdell ESA funds must be disbursed by the time the child or beneficiary reaches age 30. The only downside of this move is that 529 plans generally have limited investment options whereas Coverdell ESA funds could have been invested in nearly any publicly traded security.

So, what now? I recommend existing Coverdell ESAs be rolled over to 529 plans to obtain the more generous benefits.


ABLE, aka Achieving a Better Life Experience, accounts were created by 2014 legislation designed to assist individuals with disabilities. These accounts are similar to 529 plan accounts in that they can receive a maximum after-tax contribution of $15,000 per year and grow on a tax-deferred basis that becomes tax-free if used for “qualified disability expenses.” These qualified expenses include education, housing, transportation, health care, and financial management to improve the quality of the disabled beneficiary’s life.

The primary benefit of the ABLE account is that a wide range of expenditures can be made, and assets accumulated, without disqualifying the disabled beneficiary from various public service benefits like Social Security, Medicaid, and SNAP (“food stamps”). Thanks to tax reform legislation, 529 plan accounts can now be rolled over to ABLE accounts. This is a great benefit for families who have funded 529 plan accounts for children who later became disabled and are unable to attend college.

The new tax law has set forth several changes that surely will increase the popularity and usability of 529 plans. Whether for your family’s own benefit, or for your clients’, I encourage you to further familiarize yourself with the nuts and bolts of these savings plans that can drastically improve future finances.

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