Recent 529 Changes
As you may have heard, the SECURE Act was passed in late December of 2019, with what many are calling the most comprehensive changes to retirement in over a decade. SECURE stands for Setting Every Community Up for Retirement Enhancement, and the act aims to strengthen retirement security in the U.S.
While the headlines picked up the change in the RMD beginning age to 72, and a few other “flashy” topics, there were a couple of notable changes to 529 College Savings Plans that are important to note.
First off, with the student loan crisis growing each year, congress decided to allow 529 account holders to withdraw a limited amount of money from their account to pay down student loan debt, making it a qualified expense. Up to $10,000 lifetime can be used to reduce student loan balances while maintaining its preferential tax-treatment just like other qualified expenses (tuition, books, etc.). While this will not make much of a dent in some students’ loans, it can cut the average student loan balance of $37,172 (according to debt.org, 2017) by over 25%. Another interesting aspect is that each sibling of the 529 beneficiary is also able to take a $10,000 lifetime amount from the plan as a qualified expense to pay down their student debt.
There is another major inclusion to qualified expenses drawn from a 529 plan: fees, books, supplies and required equipment for a beneficiary enrolled in an apprenticeship program. Please note, the apprenticeship program must be certified with the Department of Labor (DOL). This is a welcomed sign for those who support the trades, and the value of a career track outside of college.
Both of these changes are effective with distributions in 2020.
As you plan and save for college, these enhancements to qualified 529 plan expenses give you more flexibility to use the money you have set aside for higher education.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal 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. (20-060)