The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law December 2019 to boost retirement planning. Some of its key provisions gave small businesses easier access to tax-advantaged retirement savings plans, allowed part-time workers to participate in these plans and pushed the required minimum distribution age from 70 ½ to 72. But this retirement enhancement act also included two non-retirement provisions in the form of new qualified plan expenses for 529 college savings plans.
The first qualified plan expenses the SECURE Act added to 529 college savings plans are apprenticeship programs. The Department of Labor provides a search tool1 to find out if your particular apprenticeship program is eligible. If it is, 529 plan funds can be used towards program fees, books, supplies and equipment, including the often-expensive tools needed for the trade.
Student Loan Repayment
The second new qualified plan expense for 529 plans is student loan repayment. Beneficiaries of a 529 plan can use up to $10,000 of their plan’s balance to repay any qualified education loan, as can any siblings of the beneficiary. The $10,000 amount is the lifetime limit per recipient; this means, for example, a person cannot use $10,000 from their own 529 plan and then additional funds from their sibling’s 529 plan towards their student loans.
Before withdrawing funds for loan repayment, call your state’s plan provider to confirm whether they adopted the Tax Cuts and Jobs Act federal language for what constitutes a “qualified higher education expense.” If your state did not conform to the new federal tax laws, then the SECURE Act expansion to include student loans may not apply at the state level, which means if your state has income tax then you would owe state income tax on the earnings portion of the 529 plan distribution.
Keep in mind that the IRS prevents double-dipping, so if you make a student loan payment with a distribution from your tax-advantaged 529 plan, you cannot then claim a student loan interest deduction on the interest you paid using a 529 plan.
While a 529 plan has many benefits, there are other college savings tools—like UTMAs/UGMAs and ESAs—to consider. No single strategy is right for every family. Your financial advisor can work with your tax advisor to devise an appropriate college savings and student loan repayment strategy for your family. At Walsh & Associates, we offer comprehensive services to simplify and manage your financial life. Planning for education expenses is one of our specialties.
Walsh & Associates and LPL Financial do not provide tax advice or services. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.