The SECURE Act: Expanded Tax-Free Section 529 Plan Distributions
As has become usual practice, Congress passed some meaningful tax legislation as it recessed for the holidays.
In one of the new meaningful laws, enacted on December 20, 2019, you will find the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act).
The SECURE Act made many changes to how you save money for your retirement, how you use your money in retirement, and how you can better use your Section 529 plans.
Each week, I present one of the eight game changers of the SECURE Act. In week seven, Congress expands tax-free Section 529 distributions.
Distributions from your child’s Section 529 college savings plan are non-taxable if the amounts distributed are
investments into the plan (your basis), or
used for qualified higher education expenses.
Qualified higher-education expenses now include
fees, books, supplies, and equipment required for the designated beneficiary’s participation in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act, and
principal or interest payments on any qualified education loan of the designated beneficiary or his or her siblings.
If you rely on the student loan provision to make tax-free Section 529 plan distributions,
there is a $10,000 maximum per individual loan holder, and
the loan holder reduces his or her student loan interest deduction by the distributions, but not below $0.
This change applies to distributions made after December 31, 2018 (not a typo—see below).
Tax tip. Did you notice the 2018 above? Good news. You can use the new qualified expense categories to identify tax-free Section 529 distributions that are retroactive to 2019.
Next Week: RMDs on Inherited Accounts