A new federal law expands the definition of qualified higher education expenses that can be paid for with 529 funds.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law on December 20, 2019. Two provisions of the act concern 529 plans and are retroactive to January 1, 2019.
Here’s what the SECURE Act could mean for you as a my529 account owner.
- my529 funds can now be used to cover registered apprenticeships as qualified higher education expenses, as well as fees, books, supplies and equipment required for participation. To qualify, apprenticeships must be registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.
- my529 funds are now eligible to repay qualified education loans. This includes amounts paid—as principal or interest—on any qualified education loan of the beneficiary, or a sibling of the designated beneficiary. Withdrawals for loan repayments are limited to $10,000 in distributions from all 529 accounts. Distributions to a sibling would also have a $10,000 limit. However, the account owner cannot use 529 funds to repay interest on a qualified loan and still claim a tax deduction for student loan interest. Consult your tax or legal advisor regarding your individual situation, and to determine whether a student loan meets the requirements of a qualified education loan.
Making a withdrawal. my529 currently sends withdrawal checks to the account owner, the beneficiary or the eligible educational institution. This practice will not change with the passage of the SECURE Act. Account owners or beneficiaries who wish to take advantage of the new provisions will need to withdraw funds from their my529 account and then make a payment to the apprenticeship program, student loan lender/company, or sibling.
After a withdrawal, the account owner or beneficiary will receive an IRS Form 1099-Q. The person who receives the form should keep accurate records of the qualified higher education expenses incurred in the case of an audit.
The law will be retroactive to expenses made after December 31, 2018. my529 account owners can claim these benefits for the 2019 tax year.
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Your Guide to Financial Independence
Rick Epple, CFP(r), CeFT (r)