Can You Use a 529 Plan to Pay off Your Student Loan?
SECURE, or the Setting, Every Community Up for Retirement Act, became law from a bipartisan bill on December 20, 2019. This seems to be a good piece of news, more so now just after we’ve all celebrated the holiday season. The Act is an essential part of retirement legislation. It is an initiative that started over a decade ago which has provisions to help individuals save more for retirement and make them financially independent. This particular act has significant changes in education savings and includes benefits attached to the 529 plan. With that said, can the 529 Plan help you pay off your student loan? Let’s explore this, shall we?
Changes to Watch out For
If you didn’t know, 529 plans are tax-advantaged accounts designed to help people save for a college education. You can withdraw money from a 529 plan irrespective of whatever the time and reason might be. However, when it comes to non-qualified distribution, the earnings might be tax-deductible. Along with it, you need to pay a 10% fine.
Blaming parents for being indecisive about choosing a 529 Plan isn’t fair as their leading cause of worry is usually having leftover funds after the beneficiary completes their graduation. Before the SECURE Act was part of the regulatory framework, students had to shell out around $10,000 for college expenses. The bill finally raised the upper limit of qualified higher education costs to incorporate student loan repayments and apprenticeship program expenses. They are, thereby, providing debt-ridden families the much-needed cushion.
How Can You Pay Student Loans Using a 529 Plan?
According to the latest reports, anybody having a 529 plan account can withdraw around $10,000 to pay for education loans. The amount is the lifetime limit that applies to the beneficiary of a 529 plan. This plan is transferable among family members as well. For instance, a parent who has three kids might avail a distribution of $10,000 to shell out payments on student loans for a single child, for a total expense of $30,000. The law enables grandparents to help their grandchildren pay for qualified college expenses.
Under usual circumstances, distribution for a 529 plan owned by grandparents’ non-taxable income on a student’s FAFSA or the Free Application for Federal Student Aid. The financial aid package of a student might reduce by almost 50% of untaxed income. For example, if a grandparent takes out $10,000 from a 529 plan to pay for their grandkid’s college expenditures, it could pretty well lead to a reduction in the financial aid eligibility of the grandchild by almost $5000.
How to Use the 529 Plan to Pay for an Apprenticeship Program?
Predicting a child’s career choice is impossible. A parent might choose a 529 plan while their kid is young, only to know later on that their kid does not want to join a traditional college. The 529 plans are useful even if you’re going to pay for post-secondary institutions like trade schools or any vocational programs.
However, before the SECURE Act came into play, the amount spent on apprenticeship programs was not seen as a qualified expense under the 529 plan. If you are following apprenticeship programs, you might be eligible to receive on-site training to build up a career in health care, information technology, manufacturing, and construction.
The State Tax Benefits of the 529 Plan
You might get a tax credit or an income tax deduction for your contributions to a 529 plan. However, there are a few states that offer a tax break. In case your state adheres to the federal law, the distributions of a 529 plan might be non-eligible. The state of California imposes a penalty tax of 2.5% on the earnings in the case of non-qualified distributions.
The owners of a 529 plan should know their state’s laws in regards to the distributions for apprenticeship costs and student loan payments. Even if the state you reside in does not comply with the recent amendments to 529 plans, you can still reap the federal tax benefits. For most middle-class Americans, 529 plans are mostly useful for setting aside money for college. We hope this information was helpful and will come handy with planning your finances. However, if you want to learn more about how you can use the plan to pay off your student loan in your state, contact a student loan advisor.
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