By Leonard Sloane
For many years, "529" education-savings plans have been a
tax-advantaged vehicle for parents and grandparents to accumulate
funds for a child's college costs. A new law, enacted at the end of
last year, has made these plans even more advantageous.
The Secure Act -- which stands for Setting Every Community Up
for Retirement Enhancement -- covered many changes in federal tax
law. One group of changes focused on 529s, providing families with
additional options as they plan for the coming school year.
Specifically, the accounts now have expanded uses for
student-loan repayments as well as for apprenticeships. This
continues the expansion of 529s, which had already been changed in
2017 to allow up to $10,000 annually of 529 money to be used not
just for college, but for private-school K-12 tuition.
"The new law is a step in the right direction," says Mark
Kantrowitz, publisher of Savingforcollege.com, a website that
provides information about 529 plans. "It gives people a little bit
First, the basics: State-sponsored 529 plans, named after a
section of the Internal Revenue Code, were created in 1996. Money
deposited in these accounts is invested in mutual funds and
exchange-traded funds on a federal after-tax basis, similar to Roth
Assets in a 529 plan, also known as a qualified tuition program,
aren't taxed when withdrawn, as long as the money is used to pay
for qualified educational expenses for a beneficiary -- a full-time
undergraduate or graduate student at an accredited institution.
These expenses include tuition, books, computers, internet access,
supplies, equipment and fees. They may also include room and board
if the student is enrolled at least half-time.
Many states also offer state income-tax deductions or
Loan repayments with leftover funds
The Secure Act makes it easier to deal with excess funds in a
Sometimes there are leftover funds in a 529 account after paying
for a student's educational costs. For example, a student might
graduate from college in three years instead of four, leaving an
excess in the account that can be used by someone else in the
family. If so, the options include holding the assets in the
account in the event that the beneficiary pursues further
education. Another option is reallocating the money to another
qualifying family member by changing the beneficiary without any
"I know of a situation where a parent went back to school using
the funds that remained in his child's 529 account," says Ed Slott,
president of Ed Slott & Co., a Rockville Centre, N.Y.
tax-consulting firm. "It was a good deal."
Now, because of the Secure Act, families can use up to $10,000,
a lifetime limit, of the excess in a beneficiary's account to take
tax-free 529 plan distributions for the beneficiary's student-loan
repayments. Both principal and interest on an education loan are
now considered a qualified 529-plan expense. However, to avoid the
abuse of double dipping, that student-loan interest isn't eligible
for a deduction when filing federal income-tax forms. The earnings
portion of the distribution used to repay the loan reduces the
$2,500 annual limit on student-loan interest deductions.
Since there is no time limit on contributing to 529 plans.
families can continue contributing throughout the student's college
years and afterward, using leftover funds to repay student
When a grandparent owns a 529-plan account, distributions are
considered untaxed student income on the Free Application for
Federal Student Aid (Fafsa). That income can reduce a beneficiary's
financial-aid package by as much as 50% of the value of the
distribution. To avoid this penalty, the grandparent can delay
making a withdrawal until Jan. 1 of the student's sophomore year,
when the distribution will no longer affect untaxed income on the
Fafsa if the student graduates in four years. In that case, the
student may have to borrow during the freshman year and the fall
term of the sophomore year until the grandparent's 529 funds can be
What's more, up to $10,000 per sibling can now be used to repay
the student loans of each of the beneficiary's siblings. Siblings
include stepbrothers and stepsisters along with brothers and
sisters. Thus, leftover funds in a 529 account would be available
for student-loan repayments for an older sibling who has already
The new law also allows 529s to be used for apprenticeship
programs, which may offer college credits as well as job training.
Covered expenses include fees, books and equipment such as required
tools for the apprenticeship.
The program must be registered and certified by the U.S. labor
secretary under the National Apprenticeship Act. A list of eligible
apprenticeships can be found on the website
The 529-plan changes in the Secure Act apply retroactively to
distributions made after Dec. 31, 2018.
Mr. Sloane is a writer in New York. He can be reached at
(END) Dow Jones Newswires
July 03, 2020 11:58 ET (15:58 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.