Tax Law Updates to 529 Educational Plans

529 Educational Plans Should Be Gaining in Popularity

529 Educational PlansNow that the dust has settled and the tax code has been “reformed,” it’s time to unpack those changes and analyze how best they can help you. One of the changes was the expansion of 529 educational plans. Under the Tax Cuts and Jobs Act, eligible expenses include up to $10,000 per person per year for K-12 educational expenses. Given the popularity and rising costs of private education, and the state income tax breaks associated with many of these accounts, 529 educational plans should see a spike in popularity.

529 Plans – A Quick Overview

529 plans were created by Congress in the mid 1990s as way for families to save money for college education expenses, which at that time had just begun to skyrocket. There are two types of 529 plans: a prepaid plan and a savings plan. We will focus on the savings plans because they are most prevalent. If you understand how a Roth IRA works, you should have a pretty good idea of how a 529 savings plan works. A 529 plan is an investment account funded with after-tax money. The earnings grow tax-free and the withdrawals are tax and penalty free as long as they are qualified. Even better, some states provide state income tax deductions for contributions! Currently, 34 states offer some type of deduction or credit for 529 plan contributions.

Continue reading

Tax Reform is Here!

2018 tax reformWhat Tax Reform Means to You

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This far-reaching piece of legislation will overhaul the tax code. But what does the tax reform mean for you and your retirement plan? Here are some highlights.

Big Changes

Tax reform keeps seven tax brackets and lowers the top rate to 37% for individuals. The Alternative Minimum Tax (AMT) has been scaled way back. The standard deduction is doubled to $12,000 for singles and $24,000 for those who are married, filing jointly, and the child credit has been expanded. Personal exemptions are suspended.

Many popular deductions have been eliminated or scaled back. The state and local tax deduction is limited to $10,000, and the mortgage interest deduction will be limited to the first $750,000 in mortgage interest debt for new home purchases.

These changes, like most of the changes tax reform brings for individuals, are scheduled to sunset after 2025. Tax reform also brought sweeping reform to corporate taxation. Changes on the corporate side, unlike the individual side, are permanent.

Continue reading

Happy Anniversary to the Roth IRA!

Happy Birthday Roth IRAHappy Anniversary to the Roth IRA! Celebrating 20 years in 2018.

IRAs started small. The first IRAs created in 1974 had two purposes:

1.  As a retirement savings vehicle for employees not covered by employer retirement plans; and
2.  As an account to hold distributions from employer plans on separation from service

These first IRAs could accept annual contributions not exceeding the lesser of $1,500 or 15% of earned income, only from employees who were not covered by an employer’s qualified retirement plan. Distributions from them were subject to still familiar rules — being taxable income at ordinary rates, with required minimum distributions (RMDs) starting at age 70½, and distributions before age 59½ subject to 10% penalty. They could accept rollovers from company plans.

Continue reading