Distributions from 529 savings plans
Before the signing of the Tax Cuts and Jobs Act of 2017, distributions from 529 savings plans were only considered “qualified” if the distribution was used for higher education expenses (i.e., college expenses). The TCJA expanded the definition of a “qualified” distribution to include elementary and secondary school (K-12) expenses, up to $10,000 each year. A big benefit for families looking for tax and penalty free ways to fund their children’s education.
Changes coming in Colorado?
Since the TCJA, there continues to be an ongoing debate in Colorado regarding the implementation of the expanded definition of the qualified withdraw provision.
Since December 2017, CollegeInvest, Colorado’s 529 savings plan administrator, has maintained autonomy from the TCJA citing Section 529 of the federal tax code, which authorizes each state administrator to determine its unique tax treatment for distributions.
This debate may come to a head soon as opposing Colorado Senate, and House bills are going to see a vote in the coming weeks.
- Senate bill SB20-073 proposes maintaining the current autonomy from the TCJA, clarifying that distributions for K-12 expenses are not considered qualified. This bill is currently under consideration.
- House bill HB20-1034, proposes to align Colorado’s law with the federal regulation already in place. It is worth noting that a similar House bill (HB19-1123) was voted down in 2018. This bill is currently under consideration.
Similarly, the SECURE Act, the federal law which just passed in December, expanded the qualified use of 529 savings accounts by allowing withdrawals for student loan repayments. At this time, Colorado tax law remains unchanged, so any withdrawals for this purpose would be considered non-qualified.
We are keeping a close eye on these developments as they have the potential to impact financial plans and gifting strategies. We are happy to discuss these topics in more detail, given your specific situation.