Lana Oconnell
A 529 plan is a tax-advantaged college savings account that can be used to pay for a designated beneficiary's post-secondary education expenses. In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed, allowing 529 plan holders to make penalty-free withdrawals of up to $10,000 to repay their student loan debt. This lifetime limit applies per borrower, not per plan, and includes the beneficiary's siblings. While the SECURE Act expanded the usage of 529 plans, certain states may not consider student loan repayment as a qualified expense, and it's important to understand your state's definition to avoid unexpected tax penalties.
| Characteristics | Values |
|---|---|
| Can you use a 529 account to pay student loans? | Yes |
| Is there a limit? | Yes, up to $10,000 per borrower |
| Is it penalty-free? | Yes |
| Can it be used for K-12 tuition? | Yes |
| Can it be used for off-campus housing? | Yes, but the cost must be comparable to on-campus costs |
| Can it be used for online college courses? | Yes |
| Can it be used for apprenticeships? | Yes |
| Can it be used for professional training? | Yes |
| Can it be used for continuing education programs? | Yes |
| Can it be used for certification programs? | Yes |
| Can it be used for credentialing? | Yes |
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What You'll Learn
Student loan interest tax deduction
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, up to a lifetime maximum of $10,000 per person. However, the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes.
Now, what is a student loan interest tax deduction? Student loan interest is the cost of borrowing money to pay for your education. When you take out a student loan, you agree to repay the loan amount (the principal) plus interest, which is calculated as a percentage of the unpaid principal balance. The student loan interest tax deduction can help with your bottom line as you’re repaying your loans. If you’re currently making or will be making student loan interest payments to pay back what you took to finance your higher education, the student loan interest deduction is for you.
Federal student loan borrowers could qualify to deduct up to $2,500 of student loan interest per tax return per tax year. As long as your student loan qualifies, you can claim the student loan interest tax deduction as an adjustment to income. You don’t need to itemize deductions to claim it.
To claim the deduction, the following must apply:
- You paid interest on a qualified student loan in the tax year 2024.
- You're legally obligated to pay interest on a qualified student loan.
- Your filing status isn't married filing separately.
- Your modified adjusted gross income (MAGI) is less than a specified amount that is set annually.
- Neither you nor your spouse, if filing jointly, were claimed as dependents on someone else's return.
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Tax-free withdrawals
A 529 plan is a tax-advantaged college savings vehicle that allows for tax-free withdrawals on qualified expenses. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the definition of qualified distributions, allowing 529 plans to be used to repay the principal and/or interest on the beneficiary's student loan debt, up to a lifetime maximum of $10,000 per person. This limit is per borrower, not per 529 plan, and the designated beneficiary's siblings can also benefit from this provision, with a lifetime limit of $10,000 each.
The SECURE Act's passage expanded the definition of qualified expenses to include student loan repayments, but it's important to note that not all education expenses qualify for tax-free withdrawals. For example, while the cost of off-campus housing for a freshman can be covered, provided it is comparable to on-campus costs, travel costs or fraternity and sorority fees are not considered qualified expenses. Additionally, while the Tax Cuts and Jobs Act of 2017 allows 529 plans to be used for K-12 tuition, this only applies to tuition fees and not other expenses such as books and board.
To avoid unexpected fees or penalties, it's crucial to understand what constitutes a qualified expense. Qualified higher education expenses typically include tuition and fees, books and supplies, computers and internet access, and software required for college courses. However, software for entertainment or amusement and other electronics like smartphones are not covered. It's also important to note that the definition of qualified expenses may differ between states for state tax purposes.
While 529 plans offer tax advantages, it's important to be mindful of the rules and regulations surrounding their usage. For instance, while funds can be used to pay for online college courses, the college must be an eligible institution that is qualified for Title IV federal student aid. Additionally, in the case of grandparent-owned 529 plans, any money withdrawn and used for college expenses is considered income to the student and must be reported on the Free Application for Federal Student Aid (FAFSA).
In summary, 529 plans offer tax-free withdrawals on qualified expenses, which now include student loan repayments up to a lifetime limit. However, it's essential to understand the specific rules and regulations to maximize your savings and avoid unexpected penalties.
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Qualified expenses
A 529 plan is a tax-advantaged college savings vehicle that can be used to pay for a designated 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 withdrawing $10,000 from multiple 529 plans will not bypass the limit. The SECURE Act also allows for additional withdrawals of up to $10,000 per beneficiary sibling, and the definition of sibling includes brothers, sisters, stepbrothers, and stepsisters.
For post-secondary education, 529 plans can also be used to pay for on-campus housing, off-campus rent, and meal plans, as long as the beneficiary is enrolled at least half-time. Off-campus housing costs must be comparable to on-campus costs, and the college's cost of attendance allowance limits them. Room and board for approved study-abroad programs and summer rent for half-time students also qualify. Additionally, 529 plans can cover the cost of purchasing a computer, peripheral equipment (like a mouse or speakers), computer software, and internet access, as long as the beneficiary uses them during their enrollment at an eligible educational institution. However, computer software with no relation to the beneficiary's studies, such as computer games or sports software, does not count as a qualified expense.
It is important to note that not all expenses are covered by 529 plans, and understanding which costs qualify can help avoid taxes and penalties. For example, travel costs, fraternity and sorority fees, and non-mandatory books and supplies are not considered qualified expenses. To avoid unexpected fees or penalties, it is recommended to check with the 529 provider and the educational institution to ensure that an expense is qualified.
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529 plan distribution
A 529 plan is a tax-advantaged college savings account that can be used to pay for a designated beneficiary's post-secondary education expenses. Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, 529 plan holders can make penalty-free withdrawals to pay off student loan debt for the designated beneficiary and each of their siblings, up to a lifetime maximum of $10,000 per person.
The SECURE Act 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 debt. This change provides greater flexibility for families in utilising 529 plans for education-related expenses.
It is important to note that the $10,000 limit is per borrower, not per 529 plan. If a borrower receives the maximum distribution and then refinances the remaining debt into another person's name, the new borrower may be eligible for another $10,000 in qualified distributions, provided they have not reached their own limit. The definition of a sibling includes brothers, sisters, stepbrothers, and stepsisters. Additionally, the account owner can change the beneficiary to a parent and use the 529 plan to pay off up to $10,000 of parent education loans.
When making withdrawals from a 529 plan, it is crucial to understand the difference between qualified and non-qualified expenses. Qualified expenses include tuition, fees, books, equipment, certain room and board expenses, and expenses for students with special needs. Non-qualified expenses, on the other hand, may incur tax penalties. To avoid penalties, ensure that the expense is paid for in the same year the distribution is taken, as mismatched reporting with the IRS may result in taxes and penalties.
Furthermore, electronic bank transfers from a 529 plan typically take 3-5 business days, so it is important to make withdrawal requests in a timely manner to meet payment deadlines. It is also recommended to consult a financial or tax advisor to understand how state-based benefits and limitations apply to your specific circumstances.
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Beneficiary and their siblings
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. The lifetime maximum amount that can be withdrawn is $10,000 per person. This means that if a family has three children, they can withdraw a total of $30,000. It is important to note that the portion of student loan interest paid by these distributions is ineligible for the student loan interest tax deduction for regular income taxes.
The definition of a sibling includes brothers, sisters, stepbrothers, and stepsisters. The account owner can change the beneficiary to a parent and use this to pay off up to $10,000 of the parent's education loans. If each parent has borrowed parent loans, the account owner can change the beneficiary from one parent to the other to pay off that parent's education loans.
The SECURE Act expanded the definition of qualified distributions from a 529 plan to allow 529 plans to be used to repay the principal and/or interest on qualified education loans of the beneficiary and the beneficiary's siblings. This means that 529 plans can now be used to pay for a wide range of education expenses at elementary, secondary, and post-secondary schools, including community colleges, four-year colleges and universities, graduate schools, and trade, technical, and vocational schools. Additionally, 529 plans can also be used to pay for professional training such as apprenticeships, credentialing, and certification programs, and continuing education programs.
It is important to note that not all education expenses qualify for tax-free 529 plan withdrawals. For example, while 529 plans can cover an off-campus apartment if the student is not living in a dorm, the cost of off-campus housing must be comparable to the on-campus costs. Travel costs, fraternity and sorority fees, and other similar expenses are not covered by 529 plans. To avoid unexpected fees or penalties, it is important to understand what qualifies as a qualified expense for 529 plan withdrawals.
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Frequently asked questions
Yes, you can. 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.
You can withdraw up to a lifetime maximum of $10,000 per person. Additionally, you can withdraw up to $10,000 for each of the beneficiary's siblings.
The SECURE Act established that principal and interest payments toward a qualified education loan are considered qualified education expenses. This means that you can make tax-free withdrawals from your 529 account to pay off student loans.
