Oregon College Savings Plan: Examining the New Changes and Existing Opportunities
Oregon College Savings Plan: Examining the New Changes and Existing Opportunities
Recently, there have been two significant changes that affect the Oregon College Savings Plan (one of the Oregon state-sponsored 529 plans). This presented an opportunity to share updates and examine commonly overlooked planning opportunities.
Background and Highlights on 529 Plans and Oregon College Savings Plan
529 Plans are State-Sponsored Education Savings Accounts (The Oregon College Savings Plan is one of the available Oregon-sponsored Plans)
Tax Advantages of 529 Plans: Taxation Similar to Roth IRA
After-Tax Contributions
Tax-Free Growth
Tax-Free Distributions if used for qualified education expenses
If funds are not used for qualified education expenses, the investment growth is subject to ordinary income taxes and a 10% penalty.
Oregon provides an incentive for Oregon residents to contribute to an Oregon-sponsored plan: Oregon state income tax deduction is available for contributions up to $4,750/year (Married filing jointly) and $2,375/year (all other filers) for 2018. Note: This amount will typically see small increases each year for inflation.
New Plan Manager for The Oregon College Savings Plan
The Oregon College Savings Plan recently decided to change to a new plan manager and the transition is scheduled to be complete by September 12th. Earlier this year at a local meeting for the Financial Planning Association (FPA) of Oregon & SW Washington, we were able to hear directly from the plan advisor about the anticipated changes, including the details on their thought process and analysis. After learning more about these changes, they appear to be positive improvements that should help the plan and plan participants.
Highlights of Plan Changes Include:
Cost: Currently the fees will be approximately the same as the previous plan, but a new fee structure will allow for the costs to decrease in the future as the plan grows.
Investment Funds: The investment fund lineup has been revamped and now includes additional lower-cost fund options from well established and respected fund companies like Vanguard and DFA.
Changes to Age-Based Funds: The previous plan manager had an option to select an age-based portfolio (blend of funds to match the time horizon for college). The new plan manager improved and optimized this option by doing the following:
The old plan used an Age Group (i.e. Age 0-4). The new plan will utilize College Start Date instead since the actual enrollment age can vary.
The old plan assumed an investment time horizon that ended at age 18. Since college typically extends through age 21-23, the new option expands the investment time for horizon through the end of college.
The new plan changes the process for making the portfolio more conservative over time as the beneficiary gets closer to college. It will now be more gradual and efficient which can mitigate the risk of selling the stock portion of the portfolio on a down market day.
Navigating the New Rule Change for K-12 Expenses
Previously, K-12 private school expenses were not qualified education expenses under a 529 plan. The recent Tax Cut and Jobs Action of 2017 Tax Act now treats withdrawals for up to $10k/year for K-12 expenses as qualified education expenses.
Oregon did not extend favorable tax treatment for K-12 expenses. If you take distributions from K-12 expenses, Oregon state income tax deductions previously taken for contributions will be added back to taxable income. In addition, any investment gains will be subject to Oregon state income tax.
The Oregon treatment of this new rule makes it less attractive as a planning strategy for K-12 private school but could still be a viable option to consider under the right circumstances. If your family cash flow has become tight and private school costs have become stressful for your family, using 529 plan funds could be worth the relief since the tax consequences are now lower.
For example, you have a non-Oregon 529 Plan where you contributed $8,000 and the account balance has grown to $10,000. If you withdrew the $10,000 for K-12 private school, you would pay approximately $200 in Oregon taxes ($2,000 gain at 10% = $200).
What are the Planning Opportunities and Considerations with the Oregon College Savings Plan?
Rollover Tax Savings Opportunity: Do you have an existing 529 Plan sponsored by another state? There is an opportunity to rollover this plan into the Oregon plan and capture immediate savings in Oregon state income taxes even if you don’t make any additional contributions.
State Income Tax Deduction Planning: Are you taking full advantage of the Oregon state income tax deduction? There are other considerations other than contributing the deductible limits each year. Examples include: Planning around contributions over the deduction limit that can be carried forward and used in future years (subject to limitations). Also, it may not be too late if your child is very close to or currently in college. Contributing funds even if it is for the short-term can still create state income tax savings that you could be missing out on.
Be Conscious of Federal Gift Tax Limits: Contributions to a 529 plan are considered gifts and can be subject to gift tax if above $15,000 per donor ($30,000 for married), per beneficiary each year (2018). Gifts above those thresholds can avoid gift tax but may create added cost and inconvenience of filing a Gift Tax Return. If you recently received a sum of money like an inheritance, it could make sense to spread the contribution over a few years instead of making one large upfront contribution.
Special Needs: If you started a 529 plan and there is a possibility that your child may not be attending college due to special needs, there is an opportunity to roll that account into an ABLE Savings Plan (tax-advantaged savings plan for individuals with disabilities that does not affect their government benefits). This opportunity is subject to rules and limitations. For more information click here https://oregonablesavings.com/.
If you want more information or have any questions:
If you have questions or would like more information you can visit www.oregoncollegesavings.com or contact Human Investing through our website at https://www.humaninvesting.com/contact-us/
