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Saving for college can be a daunting task for any family. Fortunately, there are several tax-advantaged savings vehicles available to help like Section 529 plans. As discussed in a previous newsletter article, 529 college savings plans offer tax-free growth, donor control, and hassle-free administration. Owners of 529 plans benefit from tax-free growth by using the plan’s funds for qualified education expenses (e.g., tuition, fees, books, and room and board). Distributions used for nonqualified expenses, however, incur ordinary income tax and a 10% penalty on the earnings portion of the plan (but not on the contributions).

SECURE Act Benefits 529 Plans

The core features of 529 plans have remained intact since their inception, but recent legislation has modified these plans (in largely positive ways). The 2017 Tax Cuts and Jobs Act (TCJA) allows families to now use 529 plan funds of up to $10,000 per year per beneficiary for tuition at private and religious K-12 schools.1 The recently enacted Secure Act (Setting Every Community Up for Retirement Enhancement Act) also broadened 529 plan qualified expenses to include apprenticeships and qualified education loan repayments.

The Secure Act is a bipartisan retirement bill included in a larger government spending bill that was signed into law in December 2019. The legislation includes many provisions that affect the way we currently plan for retirement, including taking required minimum distributions (RMDs), inheriting IRAs, and making IRA contributions later in life. While the Secure Act affects many aspects of retirement, it also touches 529 plans.

The Secure Act positively impacts 529 plans in two key ways. First, it expands qualified tuition expenses to include apprenticeship programs that are registered with or certified by the Department of Labor. Second, 529 plan assets can be used for the repayment of qualified education loans, up to a lifetime limit of $10,000 (not adjusted for inflation). Even better, an additional $10,000 can now be used to repay the education loans of a 529 plan beneficiary’s siblings, though any interest on education loan debt paid with 529 plan funds will no longer be tax-deductible. These changes offer families much more flexibility with how 529 plan funds are ultimately used. To illustrate the impact of the new education loan repayment rule, let’s look at a family with three children. The parent(s) can now use $30,000 from each child’s 529 plan to pay $10,000 toward one child’s student loan and that of her or his two siblings. For this family, that’s $90,000 of 529 plan assets that can now be utilized for education loan repayment in contrast to $0 before the Secure Act.2

If you would like to know more about how the Secure Act changed 529 plans or about 529 plan accounts in general and whether they are appropriate for your situation, please contact a member of your B|O|S team.


1. Please note that the state of California has not adopted this federal change under the TCJA. Using 529 plan funds for this purpose will result in California income tax and a 2.5% penalty on the earnings portion of the withdrawal.

2. It’s important to consult your CPA to understand all tax implications and potential penalties related to the use of 529 plan funds.

Filed under: Financial Planning

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