The SECURE Act and 529 Plans

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Two significant pieces of legislation were recently passed that affect education savings plans and strategies for Americans: the Tax Cuts and Jobs Act (TCJA) of 2017 and the Setting Every Community Up for Retirement (SECURE) Act, signed into law on December 20, 2019. The TCJA provides tax benefits to lower- and middle-income families and the SECURE Act encourages better savings habits and helps Americans achieve financial security. While provisions about 529 plans within these laws are not lengthy, the implications and benefits are far-reaching, both for families saving for college and graduates with outstanding student loans to repay.

Benefits of 529 plans

As one of the most popular education savings vehicles, 529 plans offer flexibility and potential tax advantages that don’t exist with other college saving mechanisms. Contributions to 529 plans are made with after-tax dollars and grow tax-free if withdrawals are used for qualified education expenses. While there is no federal tax deduction for 529 plan contributions, 37 states and the District of Columbia offer state-level deductions or credits as a savings incentive.

Another benefit is that 529 plans are low maintenance, with many companies offering “set it and forget it” investment options and the flexibility of transferring unused funds to another beneficiary. This means extra cash can easily be reallocated to another family member to help pay for college expenses.

Changes to 529 plans

529 plans were originally created to help families pay for costs associated with post-secondary education for a named beneficiary. One of the most common concerns parents have about opening a 529 plan, however, is having leftover funds after the beneficiary has graduated from college. Thanks to the TCJA, 529 plans can now be used to pay for up to $10,000 of annual tuition expenses to attend public, private or religious elementary or secondary schools. This annual allowance is per student, not per account. If a student is the beneficiary of multiple plans, distributions are limited to a total of $10,000 a year, and excess distributions are included in gross income.

Additionally, the SECURE Act expanded the definition of qualified higher education expenses to include student loan payments and apprenticeship programs, leaving more options for families to use these savings tax-free. These new 529 rules are retroactive for distributions made after December 31, 2018.