Each year the calendar provides a subtle reminder of the benefits of a section 529 college savings plan. These plans offer tax-free growth of invested money as long as the funds are used for qualifying education expenses. In addition, many states offer tax deductions or credits for contributions made to eligible plans.
The definition of qualified expenses within 529 plans has been expanded in recent years thanks to three pieces of legislation. All three changes were passed in the last five years, and all three combine to give 529 plans more flexibility and greater functionality.
Protecting Americans From Tax Hikes (PATH) and Tax Cuts and Jobs Act (TCJA)
The first, Protecting Americans from Tax Hikes (PATH) Act of 2015, added computers, internet access, and related software to the list of qualified expenses. The second, the Tax Cuts and Jobs Act (TCJA) of 2017 allowed account holders to use up to $10,000 per year per student to pay for tuition at public, private or religious elementary and secondary schools.
Setting Every Community Up for Retirement (SECURE) Act
The third and most recent is a provision included in the Setting Every Community Up for Retirement (SECURE) Act of 2019. Beneficiaries of 529 plans may now use accumulated funds, with certain limitations, to pay down student loans. The SECURE Act also allows reimbursement for apprenticeship programs should a beneficiary elect a non-traditional schooling route.
- With the passing of the SECURE Act up to $10,000 per lifetime, per beneficiary can be used to pay down student loan debt, tax-free.
- Withdrawals for this purpose are excluded from Federal income tax and may also be excluded from state income tax, based on individual state legislation. Prior to executing this strategy, account holders should review their state’s rules to confirm whether or not student loan repayments are a qualified 529 plan expense.
- The $10,000 limit serves as an aggregate lifetime limit, meaning that once $10,000 is used for this purpose, any additional distributions to pay down student loans for that beneficiary will be subject to a 10% penalty with income taxes owed on any earnings from the account.
Those who choose to take advantage of this strategy will want to work closely with their CPAs at tax time to ensure they are not also deducting student loan interest. Account-holders will also want to ensure they are appropriately timing any withdrawals from the account since the expense must be incurred and reimbursement made during the same calendar year.
Timing of 529 Contributions
Another nuance to watch carefully is the timing of contributions to ensure that you do not “net out” the income tax benefit of the contribution with withdrawals from the account during the same calendar year. Here, in particular, it’s important to know the rules of your state’s plan. For example, Michigan’s plan nets contributions and withdrawals to obtain a state income tax deduction, while the state of Indiana provides taxpayers a tax credit, even if the account owner contributes and withdraws funds in the same year.
Many families use a 529 plan in combination with cash payments or student loans for additional expenses. With this in mind, some families may now choose to continue to contribute to a 529 plan during college, and after graduation use residual funds in their plan to repay student loans tax-free.
On 5/29 or any day, consider the benefits of a 529 college savings plan for your child or grandchild. If you are interested in exploring using 529 plan funds to pay down student debt, contact a SYM advisor.
Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.