Bipartisan legislation recently introduced by U.S. Senators Richard Burr (R-N.C.) and Bob Casey (D-Pa.) is designed to encourage more American families to save for college by making it easier for them to use Section 529 college savings accounts.
The Boost Savings for College Act (Boost) includes a nonrefundable tax credit that acts as a savings match for low- and moderate-income families who contribute to 529 plans. The bill also provides an employer match, allows excess savings in a 529 account to be rolled into a Roth IRA for retirement, and enables families with a disabled child to roll over a 529 account into an ABLE account.
“There are four main components and we think all four will be really beneficial to college savers,” Peg Creonte, senior vice president of business development for Ascensus College Savings, the leading administrator of 529 college savings plans, tells Financial Advisor.
Households would be able to claim a tax credit of up to $1,000 ($2,000 if filing jointly) if their income is at or below $30,750 (for single filers), $46,125 (head-of-household) and $61,500 (joint). Employers would be allowed to offer an annual match of up to $1,000 of an employee’s 529 contributions that, unlike current provisions, would be excluded from the employee’s gross income.
The tax credits and employer matches — an extension of what’s already available for retirement accounts — could be great incentives for more employees to open 529 college savings plans, says Creonte. Employees receiving 10 years’ of matches and market opportunities can accumulate a reasonable percentage of the cost of one year at a public college, she says.
Creonte is excited about the bill’s provision for rolling over excess savings in a 529 account — such as if a student gets a full scholarship — to a Roth IRA. “People often look at a dollar and decide whether to save it for college or retirement,” she says. “This rule can remove that barrier.”
The 529 account must be open at least 10 years before it can be rolled into a Roth IRA. The Roth IRA can belong to the owner or the beneficiary of the 529 account, she says. This is good if its owner (usually a parent) has too high an income to qualify for a Roth.
Under Boost, 529 accounts may be rolled into ABLE accounts — tax-free accounts for individuals with significant disabilities — without incurring a penalty. This is great if it’s unclear whether a disabled child will be able to attend college or if a disability develops or is detected after a 529 account is in use. The first ABLE accounts (short for Achieving a Better Life Experience) are being launched this summer in several states, says Creonte.
Creonte, who has advocated in Washington, D.C., with her industry colleagues, has observed strong bipartisan support for the Boost bill from constituents of different income levels. “There won’t be opposition,” she says, but it’ll have to be tacked onto larger tax legislation. And getting tax legislation passed in an election year is difficult.
“We’re really dependent on the machinery working in Washington to attach it to something bigger that gets passed,” she says. The good news is improvements for 529 plans were included in the Protecting Americans From Tax Hikes Act of 2015 (Path Act).
That enacted legislation enables computers to always be considered as qualified 529 plan expenses (rather than having to be mandated by a college), allows school refunds to be redeposited into 529 accounts without penalty if a student withdraws from school, and eliminates the burden for people with multiple 529 accounts to aggregate them when calculating the earnings on distributions.
Michael Canet is a Registered Representative with TCM Securities, Inc. and can offer securities through TCM Securities, Inc., Member FINRA/SIPC.
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