New options for your 529 plan in 2020
Many people have heard about the impact of the recently passed SECURE Act on retirement planning, but have you heard of the changes that this law will have on 529 college saving plans?
Some families with 529 plans for multiple children are familiar with the flexibility in these plans to roll unused balances in 529 plans from child to child. However, a common concern has been the penalty for unused funds if their child does not attend college. When the funds are withdrawn but not used for a child’s education, the earnings are subject to a 10% penalty, which can be a major headache.
The SECURE Act, signed into law in December of 2019, has given additional flexibility to owners of 529 plans. This can be crucial when planning distributions to multiple children. Effective for 2020, these changes include the ability to use up to $10,000 from a 529 account to pay off student loans. The new law also allows for 529 funds to be used to pay for apprenticeships, as long as these apprenticeships are registered with the federal labor department.
In what scenarios does this make a difference? Let’s take the Jones family for example.
John and Mary Jones have two children:
- Jenna is a senior at UMass Amherst
- Marc is a senior in high school
John and Mary had saved for their children’s college education and had accumulated $20,000 for each of their child’s college educations. As a college senior, Jenna used her $20,000 over her first 2 years at UMass Amherst. Marc, a senior in high school also has $20,000 to use toward his college education.
The only issue for Marc: Attending a four year college is not the best fit for him and he chooses an apprenticeship at a community college to be an electrician instead. This apprenticeship comes at a cost of $10,000 for courses, textbooks, supplies and equipment that he would have otherwise had to pay out of pocket. Prior to the recent changes in law due to the SECURE Act, this scenario would look like this:
Before SECURE Act | |||||
| Starting total in 529 plan | Used for Tuition | Used for Apprenticeship | Used for Student loan payments | Remaining Unused Balance |
Jenna’s 529 | $20,000 | $20,000 | $0 | $0 | $0 |
Marc’s 529 | $20,000 | $0 | $0 | $0 | *$20,000 |
*Subject to 10% penalty and income tax on earnings portion of withdrawals since not used toward qualified higher education expenses.
With the changes of the SECURE Act, the Jones family can now find new use for some of the leftover 529 funds that could not be used for Marc’s college education.
- Jenna can now use up to $10,000 from Marc’s unused 529 account to pay off some of her student loans without penalty
- Marc can use up to $10,000 from his 529 account to pay for fees, textbooks, supplies and equipment associated with his registered apprenticeship[1]
These changes now look like this:
After SECURE Act Changes | |||||
| Starting total in 529 plan | Used for Tuition | Used for Apprenticeship | Used for Student loan payments | Remaining Unused Balance |
Jenna’s 529 | $20,000 | $20,000 | $0 | $0 | $0 |
Marc’s 529 | $20,000 | $0 | $10,000 | $10,000 (Used for Jenna’s student loans) | $0 |
This strategy finds use for all of the 529 funds, and eliminates the penalty and taxation upon withdrawal.
Changes to the law have opened up additional strategies that should be considered for families juggling 529 accounts for multiple children. If you or anyone that you know has questions on the topic, don’t hesitate to reach out. We are here to help!
All the best,
Andrew Holmes
617-630-4978
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.
[1] Flynn, Kathryn. “You Can Now Use A 529 Plan To Repay Student Loans.” Forbes.com, 2019, www.forbes.com/sites/katiepf/2019/12/21/you-can-now-use-a-529-plan-to-re....