Janice Lozano
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows 529 plan holders to make penalty-free withdrawals of up to $10,000 to pay off their student loan debt. This limit applies per beneficiary and each of their siblings. The SECURE Act expanded the definition of qualified distributions from a 529 plan to include student loan repayments, providing greater flexibility for families. However, it's important to note that there may still be tax implications and other caveats depending on the state and specific circumstances.
| Characteristics | Values |
|---|---|
| Can I use a 529 plan to pay student loans? | Yes, up to $10,000 per beneficiary. |
| Who can use it? | Families, parents, and beneficiaries. |
| What is the purpose? | Repay student loan debt. |
| What is the limit? | $10,000 per borrower, a lifetime limit. |
| Can I bypass the limit? | No, even with multiple 529 plans. |
| What is a 529 plan? | A tax-advantaged college savings vehicle. |
| Who administers it? | A state or educational institution. |
| What are the tax benefits? | No federal and state income taxes on earnings. |
| Can I choose a plan outside my home state? | Yes, but additional state tax benefits may be available for local residents. |
| What happens if I use it for non-qualified expenses? | The earnings portion is subject to income taxes and a 10% penalty. |
| Who is the beneficiary? | Typically, the student, but can be changed to a parent. |
| What expenses does it cover? | Tuition, fees, books, computers, room and board, off-campus housing, etc. |
| What is the SECURE Act? | A law that allows 529 plans to be used for student loan repayment. |
| When did it become law? | December 20, 2019. |
| What is the impact of the SECURE Act? | It expanded the benefits of 529 plans and provided flexibility for families. |
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What You'll Learn
Student loan repayment rules and limits
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows 529 plan holders to make penalty-free withdrawals to pay off student loan debt for the designated beneficiary and each of their siblings. However, there are specific rules and limits to these withdrawals.
Rules
Firstly, qualified distributions are limited to $10,000 per borrower. This is a lifetime limit that applies to distributions from all 529 plans. Therefore, you cannot bypass the limit by taking distributions from multiple 529 plans. For instance, if you have a parent-owned 529 plan and a grandparent-owned 529 plan for the same beneficiary, and take a $10,000 distribution from each to repay the beneficiary’s student loans, only $10,000 of that will be considered a qualified distribution.
Secondly, the $10,000 limit is per borrower, not per 529 plan. If a borrower receives $10,000 in 529 plan distributions to repay their student loans and then refinances the remaining debt into someone else’s name (e.g. their spouse’s name), the new loan might be eligible for another $10,000 in qualified distributions, provided that the new borrower has not yet received $10,000 in total qualified distributions.
Thirdly, the SECURE Act only applies to each beneficiary and their siblings. For example, a family with three kids could withdraw a total of $30,000.
Fourthly, the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes.
Fifthly, while 529 plans are primarily intended to pay for higher education expenses, certain apprenticeship expenses, such as fees, books, and supplies, are now considered qualified education expenses.
Finally, it is important to note that using a 529 plan distribution to repay student loans may be considered non-qualified by the state, even if it is considered qualified by the IRS. The earnings portion of such a distribution may be subject to state income tax.
Other Options
If a 529 plan is not enough to cover your debt, there are other ways to repay student loans, including making extra payments, student loan refinancing, and employer assistance programs. Additionally, 529 plans can now be used for more than just higher education expenses. For example, up to $10,000 per student can be used to pay for K–12 tuition each year, or funds can be rolled over into a Roth IRA.
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State-specific rules
The rules regarding the use of 529 plans for student loan repayment vary across different states. While federal law allows individuals to use their 529 distributions to pay off student loans, some states have not adopted this change. Here are some state-specific rules regarding the use of 529 plans for student loan repayment:
Colorado: Colorado's CollegeInvest 529 plan permits 529 withdrawals for student loan repayment. However, these withdrawals are considered non-qualified distributions and are subject to state income taxes and penalties.
New Mexico: New Mexico considers student loan repayment a qualifying expense. Withdrawals for this purpose are subject to state income taxes and penalties.
New York: New York taxpayers can claim a state income tax deduction by contributing to a 529 plan. However, student loan repayment is not deemed a qualifying expense in New York. Withdrawals for this purpose will require repaying those deductions.
California: California does not allow the use of 529 plans for student loan repayment.
It is important to note that the above-mentioned state-specific rules may not be exhaustive, and it is recommended to consult the relevant state's 529 plan guide or website for the most up-to-date and accurate information regarding their specific rules and regulations. Additionally, while federal law permits the use of 529 plans for student loan repayment, there is a lifetime limit of $10,000 in qualified student loan repayments that can be made using a 529 plan.
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Using leftover 529 funds
There are several ways to use leftover 529 funds, but it's best to consult a financial professional first as there could be tax implications. Here are some options for using leftover 529 funds:
- Transfer to another beneficiary: If the designated beneficiary of the 529 plan receives a scholarship, attends a more affordable school, or does not pursue higher education, you can change the beneficiary to another child, family member, or even yourself.
- Roll over into a Roth IRA: The SECURE 2.0 Act of 2022 allows for a rollover of up to $35,000 from a 529 plan into a Roth IRA for the named beneficiary. However, the 529 plan must have been open for at least 15 years, and the rollover is subject to annual contribution limits.
- Pay off student loans: The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 allows for penalty-free withdrawals of up to $10,000 per person from a 529 plan to repay the beneficiary's student loan debt. This includes the designated beneficiary and each of their siblings. However, the portion of student loan interest paid by these distributions is not eligible for the student loan interest tax deduction.
- Cover other education expenses: Leftover 529 funds can be saved and used for future qualified education expenses, such as graduate school, trade or vocational school, or private school K-12 tuition.
- Non-education expenses: Leftover 529 funds can also be used for non-education expenses, such as a home remodeling project or a big purchase. However, the "earnings" portion of the withdrawal is taxed, and there is typically a 10% penalty.
It's important to note that the rules and regulations regarding 529 plans and their usage may vary by state, and it's always advisable to seek professional financial advice before making any decisions.
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Tax advantages and penalties
529 plans are a type of tax-advantaged college savings vehicle. They are established by Congress and administered by a state or educational institution. Earnings in 529 plans are not subject to federal tax and generally not subject to state tax when used for qualified education expenses. These expenses include tuition, fees, books, and room and board at an eligible educational institution.
Prior to 2019, withdrawals from 529 plans for student loan payments were subject to income taxes and other penalties. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed this. It allows for penalty-free 529 distributions for the purpose of repaying a beneficiary's student debt, up to a lifetime limit of $10,000 per beneficiary. This limit applies across all 529 plans, so you cannot bypass it by withdrawing from multiple plans. The SECURE Act also allows for additional withdrawals of up to $10,000 for each of the beneficiary's siblings.
While 529 plans offer tax advantages, there are some caveats to be aware of. Firstly, contributions to 529 plans are not tax-deductible. Secondly, if withdrawals are made for non-qualified expenses, the earnings portion is typically subject to income taxes and a 10% penalty. It is important to note that states may have different definitions of qualified expenses, so it is essential to check the specific rules in your state.
In addition to the SECURE Act, other laws have expanded the functionality of 529 plans. For example, the Tax Cuts and Jobs Act (TCJA) of 2017 allows 529 plans to be used for K-12 tuition, up to $10,000 per student per year. Furthermore, the SECURE 2.0 Act of 2022 allows for rollovers of up to $35,000 from a 529 plan into a Roth IRA, subject to certain conditions.
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Qualified expenses
A 529 plan is a tax-advantaged college savings vehicle that can be used to pay for a beneficiary's post-secondary education expenses. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the definition of qualified distributions from a 529 plan, allowing them to be used to repay the principal and/or interest on the beneficiary's student loans, up to a lifetime limit of $10,000 per borrower. This limit applies across all 529 plans, so you cannot bypass it by withdrawing from multiple plans. The SECURE Act also allows for additional withdrawals of up to $10,000 per beneficiary sibling.
Qualified higher education expenses are based on the definition of the cost of attendance in the Higher Education Act of 1965, which was in effect on August 4, 1997. Subsequent changes to this definition, such as allowances for the purchase of a personal computer and the cost of obtaining first professional credentials and licensing, do not apply. Some states have not adopted the federal definition of qualified expenses, so using a 529 plan distribution to repay student loans may be considered non-qualified by the state even if it is considered qualified by the IRS.
Qualified education expenses for 529 plans include tuition and fees, books and supplies, room and board, and computers. The definition of 529 qualified expenses has been expanded to include professional training such as apprenticeships, credentialing and certification programs, and continuing education programs. However, computer software that has nothing to do with your studies doesn't count as a qualified expense. Lifestyle expenses, such as insurance, sports expenses, health club dues, and travel and transportation costs, are also not considered qualified expenses.
It's important to note that withdrawals from a 529 plan for non-qualified expenses may be subject to income taxes and a 10% penalty. Therefore, it's crucial to understand which costs qualify as qualified expenses to maximize your savings.
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Frequently asked questions
Yes, you can use a 529 plan to pay off student loan debt, thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
You can use up to $10,000 per beneficiary to repay student loans. This is a lifetime limit, meaning you cannot bypass the $10,000 limit by having two or more 529 plans.
Yes, 529 plans are tax-advantaged, meaning you can avoid federal income taxes and penalties when using the plan to pay off student loans. However, the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes.
Yes, you can open your own 529 account if you're 18 or older and name yourself as the beneficiary.
