Now that Trump has signed the SECURE act, one can use 529 Plans to repay student loans. This is a pretty big piece of legislation for owners of 529 plans who have loans. There is one aspect of it I am trying to understand better. Here is the scenario:
I have $20K of qualified education expenses
I pay the $20K using a gov't loan to pay $4k and using my 529 to pay $16K.
For that tax year I claim the AOTC credit. Since $4k was used from the loan, I am allowed to do that. I couldn't take $20K from the 529 because, I always understood, that would be considered double dipping (getting a 529 tax break on the $4K and claiming the AOTC on the same $4K).
Now, with the SECURE act, I can pay back the loan with 529 money, effectively double dipping.
My first thought is that with the brand new legislation, it will take some time for folks to digest what has changed and figure out how best to take advantage (in a legal way) of the modifications.
Under your scenario above, it would have been ok to take the $20k distribution from the 529 and still claim the AOTC. Tax would be owed on the earnings portion of the $4k part of the distribution that paid QEE being used to claim the AOTC, but the 10% additional tax (penalty) would be waived under the AOTC exception.
The bill just states that any payments to loan interest or principal can be considered a QEE up to 10K per individual. I wouldn’t think too many people would find it advantageous to take out a student loan only to pay it off immediately with 529 funds?
No. But it could be advantageous for some people who have outstanding student loans and are paying on them (or not, for whatever reason) to open up a 529 get a state income tax credit or deduction if in a state that gives such things, and pay up to $10k if the loans off funneling money through the 529
Oh for sure there are people who will be able to take advantage of this. My comment was about having to repay in the year you took out the loan.
I myself plan on DS floating subsidized loans now. Might as well. People with multiple kids will be able to have older ones carry some debt to keep funds available for younger siblings and if younger siblings don’t need it all they can go back and pay off the older one’s loans.
I like the bill, but I’m not sure what it’s real purpose is.
Perhaps you may have planned on using these funds for more than one child both were expected to include some loans. Then one gets a scholarship or takes a different path. Definately use and take advantage of this to extinguish some debt.
Or if you have remaining funds and want to help a niece, nephew or adult sibling. @BelknapPoint would this exception work for a non dependent under this new option?
Though details not out, it is possible for 2 parents and a student to repay $10k each PLUS loans each parent might have taken out and loans the student took out, equaling $30k in loans paid with some savings if 529 contributions had some tax savings.
My son’s roommate is paying back student loans. Both his own and co-signed with his parent. He makes over the amount that allows any deduction for student loan interest. He could get a small tax benefit by open in a NY 529 and paying up to $10k of his loans from money he puts in there if his parents pay NY state income tax, he can do the same for loans in their names, funneling money through a 529.
I would think so. This new possibility is not something to benefit low income folks. Nor do I see a lot of unsophisticated folks jumping on this. It can take research, time and effort and organization to take advantage of this.
I figure someone making $75k in NY can benefit about $300 from NY state income tax in a year. Can repeat the next year.
I paid off around $7K off my daughter’s loan earlier this year. Did anyone hear if 529 withdrawals can be used for loans that were paid off earlier in 2019?
The state would have to adopt the law first though. Federal law allows 529 money to be used for K-12 but my state didn’t change it’s rules so any distributions for K-12 come with clawback of any state tax benefits.
So I think this is good news for us. We were just seeing if we could use our 529 in this fashion like 2 weeks ago and didn’t realize this was in the bill passed.
My son got aid that we didn’t expect and my daughter transferred Lacs and went from $20,000 or so merit to $30,000 merit. She transfered as a junior.
We had both kids take out some loans their first few years since we didn’t know what the future would hold and didn’t have 4 years in 529. We planned on using current income.
We were looking to paying ourselves back to some amount but discovered we have about $34,000 excess 529 at this point. Still have my son one year to go but my daughter graduates this year.
So now we are going to look into this. We want the kids to graduate as close to zero debt as possible. So using this to pay down their current loans would be helpful.
If I am not thinking correctly… Let me know. We will be calling the accountant on Monday… Lol…
After doing a bit more digging, clearly the Act states that qualified withdrawals from 529s can be used to pay for loans from the beginning of 2019. What the Act does not specify is anything about the timing of withdrawals. It has certainly been talked about on this forum that the payment for a qualified expense needs to be made in the same year as the withdrawal from the 529. If that is the case, there are 2 days left this year to withdraw 529 funds for loans from 2019. I haven’t seen anyone mention the urgency to do it before the end of the year. Perhaps that rule is not applicable to loans??
My understanding is yes, you can pay loans with it. If fact that’s the plus of the new ruling. After serious deliberation we are paying ourselves for some expenses then using the 529 to pay loans in 2020. My daughter graduates in May then my son graduates the year after. So using the $10,000/year per kid type of thing will happen once we know the situation. My daughter won’t even have that amount to pay off due to great merit she ended up getting that was not expected. We just want to make sure if my son’s grant will change next year before making any decisions. There is a chance my daughter might do graduate school but that might not be till the following year so for us lots of moving parts.
Perhaps with the new rule allowing the repayment of loans to be a 529 qualified expense, the “payment” timing refers to the date the repayment of the loan is done, and not the date that the original loan funds were used to pay a qualified expense?
I would hope that at some point there will be clarifications about the provisions of this Secure Act. Sometimes the writing of the guidelines takes a while.
I’m not sure if the state has to adopt the law to allow or if they have to adopt a counter measure. NY was swift to make sure that k-12 withdrawals are NOT permitted from 529s without recapture of state tax deductions. Some states remained silent about this change.