College Savings Plans in the Tax Bill

Both versions of the tax bill– House and Senate– include changes to education tax benefits. One area of both change and confusion is college savings plans. The bills aim to consolidate some of the education plans: loans, tax credits and tax-preferred savings accounts.

I talk a lot about 529 accounts in this blog. The other big college savings account is the Coverdell ESA. It differs in some substantial ways from a 529, most notably in that contributions are capped at $2,000 annually. There is also an income cap on contributions. It does have one advantage over the 529: It can be used to pay for K-12 education expenses.

Under the tax bill, Coverdells would no longer be allowed. New contributions could not be made, nor could new accounts be established. Account owners could roll existing Coverdell account balances tax-free into 529 accounts, however.

In addition, the bill allows up to $10,000 in qualified withdrawals annually from 529s to be spent on K-12 education expenses. Given the lack of dollar or AGI caps on contributions to 529s, this provides a substantial benefit to parents whose children attend private K-12 schools.

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