A new provision in the recently passed SECURE Act may come in handy for parents who have a little extra money left in their kids’ 529 accounts.
Under the new legislation, you can now withdraw up to $10,000 tax-free per 529 beneficiary to pay down a qualified student loan.
Note that this is a once-in-a-lifetime limit per beneficiary (siblings get an additional $10,000) and became available at the end of 2019.
It’s a great new tool for college students and their parents because most kids use a mix of savings and loans to pay their pay through school.
That was true in our household. Even though I used a 529 account to pay for the bulk of my daughter’s engineering degree, I wanted her to have “some skin in the game” and take responsibility for paying at least part of her own way.
She graduated with some relatively modest student loans that she’s been chipping away at. Many other families might be in a similar situation, as college bills frequently exceed what you planned for, resulting in some unexpected debt.
Now, parents or grandparents with money remaining in a 529 could give their offspring a great post-grad present, by withdrawing up to the $10,000 cap to pay down college loans.
But before you do so, don’t forget to touch base with your financial or tax advisor. While our home state of Florida has no state income taxes to complicate things, other states’ rules haven’t kept up with the new SECURE Act changes, and that federally “tax-free” $10,000 withdrawal could set off tax alarm bells on your state return.