SECURE Act: 529 Changes

If you’ve ever thought about trying to help your child or grandchild with the numerous and costly expenses associated with completing a college education, it’s likely you’ve heard about (and potentially even invested in) a 529 Savings Program. These are specific plans which enable you to contribute funds to save for the education of a beneficiary, while sometimes benefiting from income tax deductions. Usually taken out by a parent or grandparent, the money saved can be used towards costs such as tuition, fees, supplies (such as books or computers), and certain room and board situations (check your individual circumstances for eligibility). Family and friends can also contribute to these accounts, although the specific tax benefits may vary by state.

With the changes in 2017 and the most recent ones starting January 2020, it might be useful to familiarize yourself with, if you own or are thinking of owning, a 529 plan or are the beneficiary. 

Increase In Available Education Options

Previously, the funds associated with a 529 plan could only be used for higher education purposes such as college; otherwise, withdrawn monies were subjected to both income tax and a 10% penalty. This is a particularly convenient method of paying for a college education due to the tax benefits of the 529, but some parents need help with private schooling. Subsequently, from changes imposed in 2017, parents have been able to use up to $10,000 from 529 savings towards K-12 education at eligible schools and institutions annually. 

Furthermore, the introduction of the SECURE Act means that the varying types of qualified higher education eligible for 529 contributions have been expanded. Now, apprenticeships in a wide range of industries such as construction and electrician spaces, are available. This means that along with any tuition costs associated with these apprenticeship schemes, equipment such as tools and other learning resources (for instance internet access and computers) may be paid for from a 529 plan. 

I often speak to parents about how college may not be for everyone. For those who believe their child might not follow a traditional college education path, this change may encourage more savers, knowing that the tax benefits are available whether the beneficiary completes a college education or a more vocational learning path. Alternatively, the beneficiary of a 529 can be transferred without cost or penalty as long as the new recipient is a qualified family member of the original named beneficiary. 

Student Loans

Another appealing change to the 529 Plan is that a portion of student loans are now considered as part of the “expenses” category, meaning some savings within the 529 allow the beneficiary to pay down student loans. The introduction of this change was retroactive to the start of 2019 and now means that up to $10,000 over the course of a lifetime may be used to pay off portions of a loan. Another note to this advance is that up to $10,000 can also be distributed to the siblings of the beneficiary in order to pay down their student loan debt. So, if you’re the 529 account owner and you have three children, you can effectively distribute up to $30,000 among your children. 

An element to regard with this change surrounds tax deductions. In any given year when paying off a student loan, up to $2,500 may be eligible for deduction from your tax to bring the tax burden down. However, if the repayment money is sourced from a 529 account, ( the lifetime $10,000 available), this becomes ineligible for above-the-line tax deduction for interest. Therefore you may have to make further student loan contributions (sourcing the money from elsewhere) in order to still receive the tax deductions.

However, it’s useful to check with your state or contact a financial advisor, as each state has different conditions and offers contrasting benefits. Plus, keep in mind that you can open a 529 savings plan in any state and potential owners might benefit by shopping around and seeking professional advice because states with income tax may offer tax incentives.

Consider the investment objectives, risks, charges and expenses before investing in a 529 College Savings Plan. Investments in a 529 plan are neither insured nor guaranteed and there is the risk of investment loss.