SECURE Act - 529 Plans

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mcraepat9
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SECURE Act - 529 Plans

Post by mcraepat9 » Sat Dec 21, 2019 4:59 pm

:confused Thought it made sense to create a separate thread for the 529 plan changes in the SECURE Act to avoid getting swallowed by the retirement-related changes.

Questions:

1. Is the $10,000 student loan cap per beneficiary (even if many different people have 529 plans for one beneficiary)? Or by contributor? Does the contributor need to be related to the beneficiary? The reference to siblings was throwing me off.

2. Does this mean all loan repayments (up to $10k cap of course) should be run through 529 plans if you get state level deductions/credits (assuming no state-level changes in law of course)?

3. Which student loans qualify for QHEE treatment?

4. Any other changes/nuances I left out?
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livesoft
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Re: SECURE Act - 529 Plans

Post by livesoft » Sat Dec 21, 2019 5:03 pm

5. How do you think states will change their 529 plans with respect to state income taxes because an entire new way to avoid state taxes has been invented without the permission of the affected state governments?
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mcraepat9
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Re: SECURE Act - 529 Plans

Post by mcraepat9 » Sat Dec 21, 2019 5:04 pm

livesoft wrote:
Sat Dec 21, 2019 5:03 pm
5. How do you think states will change their 529 plans with respect to state income taxes?
Certainly considered this in light of state-level changes Re K-12 expenses though I figured it was prohibited by forum rules.
Amateur investors are not cool-headed logicians.

Coolguy8877
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Re: SECURE Act - 529 Plans

Post by Coolguy8877 » Sun Dec 22, 2019 12:58 am

I plan to pay off my remaining student loans in the next 3-4 years. I'm in IL (4.95% state tax, 10k 529 deduction). With the SECURE change does it make sense to fund a 529 for myself with 10k that I could use to make the final payment on my student loans? If the funds grow beyond 10k I would plan to just change the beneficiary to a planned child in the next few years for the remaining balance (assuming this is allowed; still getting up to speed on 529 plans)

My interpretation is this allows me to maximize 529 tax free growth in line with the 10k lifetime max on student loan withdrawals, as well as maximize the IL tax deduction in the year the contribution was made.

Any reasons not to consider this? Any suggested alternatives or other info to take into consideration?

FedLawyerandBaller
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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Sun Dec 22, 2019 7:51 pm

I was about to post this exact same question. I’ve completed school, and have about 9900 left in student loans. It seems like I should open an account for myself, fund it for max state tax deductibility (4K in Virginia) and then pay the loan from that. Any leftovers I can just give to my kids.

FedLawyerandBaller
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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Sun Dec 22, 2019 9:26 pm

I just signed up for my 529 account with myself as the beneficiary. I plan to contribute the max for state tax deductibility before 12/31 this year, so I can take the tax deduction and reimburse myself for my loan payments throughout the year. It’s an extra 4,000 deduction with Virginia state tax at 5.75%. Won’t make me rich but hey this forum is full of optimizers right?

nolimits
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Re: SECURE Act - 529 Plans

Post by nolimits » Sun Dec 22, 2019 10:47 pm

Hello.
I have a similar question as well.
Could i sign up for a 529 with my wife as a beneficiary (for her student loans) and while doing so, getting the state tax deduction as well?

Thanks.

cshell2
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Re: SECURE Act - 529 Plans

Post by cshell2 » Mon Dec 23, 2019 8:41 am

Keep in mind for those thinking of funneling through for state tax breaks that you lose the student loan interest deduction on your federal taxes if you pay for it with 529 money. Might be a better deal, just pointing out that the new law also prohibits double-dipping on tax benefits.

Alan S.
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Re: SECURE Act - 529 Plans

Post by Alan S. » Mon Dec 23, 2019 11:54 am

Note that the 529 provisions are effective for all of 2019, so there may still be a limited window to act this year.

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mcraepat9
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Re: SECURE Act - 529 Plans

Post by mcraepat9 » Mon Dec 23, 2019 2:12 pm

Alan S. wrote:
Mon Dec 23, 2019 11:54 am
Note that the 529 provisions are effective for all of 2019, so there may still be a limited window to act this year.
True, although given the $10k lifetime cap for loan repayment, it might make sense to wait to see how states address this. It took NY a year to decouple the K-12 changes in TCJA, taking action early would have caused a real headache.
Amateur investors are not cool-headed logicians.

wineandplaya
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Re: SECURE Act - 529 Plans

Post by wineandplaya » Mon Dec 23, 2019 3:35 pm

Alan S. wrote:
Mon Dec 23, 2019 11:54 am
Note that the 529 provisions are effective for all of 2019, so there may still be a limited window to act this year.
My state requires 529 funds to have been in the account for at least 365 days before reimbursement. So contribution before the end of the year is needed to be able to use the student loan provision in 2020, since reimbursement has to be made in the same calendar year. If I understand the rules correctly.

FedLawyerandBaller
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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Mon Dec 23, 2019 8:42 pm

This is interesting, as I was not aware of a “seasoning” period. I can’t find any literature on whether Virginia has such a requirement.

wineandplaya
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Re: SECURE Act - 529 Plans

Post by wineandplaya » Mon Dec 23, 2019 10:20 pm

FedLawyerandBaller wrote:
Mon Dec 23, 2019 8:42 pm
This is interesting, as I was not aware of a “seasoning” period. I can’t find any literature on whether Virginia has such a requirement.
Here is a list of 529 recapture provisions, not sure how complete:

https://www.savingforcollege.com/compar ... _questions

FedLawyerandBaller
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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Mon Dec 23, 2019 10:47 pm

Alan S. wrote:
Mon Dec 23, 2019 11:54 am
Note that the 529 provisions are effective for all of 2019, so there may still be a limited window to act this year.
I’m curious how you came to this conclusion? I looked at the text of the law and did not see anything explicit, which maybe that means it becomes law as soon as when the President signed it.

FedLawyerandBaller
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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Mon Dec 23, 2019 10:52 pm

wineandplaya wrote:
Mon Dec 23, 2019 10:20 pm
FedLawyerandBaller wrote:
Mon Dec 23, 2019 8:42 pm
This is interesting, as I was not aware of a “seasoning” period. I can’t find any literature on whether Virginia has such a requirement.
Here is a list of 529 recapture provisions, not sure how complete:

https://www.savingforcollege.com/compar ... _questions
Thank you. I looked up the program docs for my state and it appears there is no prohibition on using funds after they have cleared a brief (5-7 day) settlement period. If I hustle, I may even be able to do it this year.

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Re: SECURE Act - 529 Plans

Post by mcraepat9 » Tue Dec 24, 2019 12:03 am

FedLawyerandBaller wrote:
Mon Dec 23, 2019 10:47 pm
Alan S. wrote:
Mon Dec 23, 2019 11:54 am
Note that the 529 provisions are effective for all of 2019, so there may still be a limited window to act this year.
I’m curious how you came to this conclusion? I looked at the text of the law and did not see anything explicit, which maybe that means it becomes law as soon as when the President signed it.
You should CTRL-F in the law’s text for “December 31, 2018”. The law pretty clearly states that the 529 changes apply to distributions made after that date.
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markcoop
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Re: SECURE Act - 529 Plans

Post by markcoop » Tue Dec 24, 2019 3:55 pm

So does that mean one can withdraw 529 funds now, in 2019, for loan payments earlier this year? Or is it that you cannot withdraw funds in 2019, but need to wait till 2020 for the withdraw that can be used for 2019 loan payments? The reason for the second question is that alot of tax software would need to change quickly to allow the withdraw in 2019.
Mark

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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Thu Dec 26, 2019 9:14 am

I think it would apply to loan payments already made this year, given the above representation that it takes effect for December 31, 2018.

Thrif-t
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Re: SECURE Act - 529 Plans

Post by Thrif-t » Thu Dec 26, 2019 3:36 pm

So do we think it we could deposit money into our 529 b/4 the 30th to use to pay student loans that will come due December 2020? I just drained my dd 529 to pay her tuition but I'd put some $ back in to get the state deduction this year and then use it to pay loans next.

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Re: SECURE Act - 529 Plans

Post by markcoop » Fri Dec 27, 2019 9:24 am

FedLawyerandBaller wrote:
Thu Dec 26, 2019 9:14 am
I think it would apply to loan payments already made this year, given the above representation that it takes effect for December 31, 2018.
I understand that it would apply to loan payments in 2019. The rule that most people have always used is that the payment of the qualified expense and the 529 withdrawal has to happen in the same year. For example, if I pay the 2020 Spring's semester bill in December 2019, I would also need to take the qualified withdrawal from the 529 in 2019. I am trying to understand whether that will be true for loan payments. In other words, for loan payments made earlier this year in 2019, do I need (or even allowed at this point) to take the qualified 529 withdrawal in 2019 or can I wait till next year?
Mark

FedLawyerandBaller
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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Fri Dec 27, 2019 10:14 pm

Ah. I do not see any reason why the rule would or should be any different from all other QHEEs.

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Re: SECURE Act - 529 Plans

Post by Mako » Sat Dec 28, 2019 7:50 am

I had just over $2500 in loan payments in 2019. Last week I made a $2500 contribution to my 529 with me as beneficiary for a roughly 7% state deduction, and plan to make a $2500 withdrawal Monday. Anyone see a problem? My state has no seasoning requirement.

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Re: SECURE Act - 529 Plans

Post by markcoop » Sun Dec 29, 2019 9:33 am

Mako wrote:
Sat Dec 28, 2019 7:50 am
I had just over $2500 in loan payments in 2019. Last week I made a $2500 contribution to my 529 with me as beneficiary for a roughly 7% state deduction, and plan to make a $2500 withdrawal Monday. Anyone see a problem? My state has no seasoning requirement.
Still trying to get my arms around the details of 529 loan repayments. Are you rushing to do it this year because you think you have to it before the end of the year? Or do you think you can withdraw the 529 money this year or next year but just prefer to do it ASAP?
Mark

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Re: SECURE Act - 529 Plans

Post by Mako » Sun Dec 29, 2019 9:43 am

markcoop wrote:
Sun Dec 29, 2019 9:33 am
Mako wrote:
Sat Dec 28, 2019 7:50 am
I had just over $2500 in loan payments in 2019. Last week I made a $2500 contribution to my 529 with me as beneficiary for a roughly 7% state deduction, and plan to make a $2500 withdrawal Monday. Anyone see a problem? My state has no seasoning requirement.
Still trying to get my arms around the details of 529 loan repayments. Are you rushing to do it this year because you think you have to it before the end of the year? Or do you think you can withdraw the 529 money this year or next year but just prefer to do it ASAP?
Yeah for other things my understanding is you need to withdraw in the same year as the expense was paid, so I’m assuming this is the same. I have just about $10k in loans left as of early this year so to get the full benefit I’d need to use it for this year’s payments too.

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Re: SECURE Act - 529 Plans

Post by markcoop » Sun Dec 29, 2019 2:08 pm

Mako wrote:
Sun Dec 29, 2019 9:43 am
markcoop wrote:
Sun Dec 29, 2019 9:33 am
Mako wrote:
Sat Dec 28, 2019 7:50 am
I had just over $2500 in loan payments in 2019. Last week I made a $2500 contribution to my 529 with me as beneficiary for a roughly 7% state deduction, and plan to make a $2500 withdrawal Monday. Anyone see a problem? My state has no seasoning requirement.
Still trying to get my arms around the details of 529 loan repayments. Are you rushing to do it this year because you think you have to it before the end of the year? Or do you think you can withdraw the 529 money this year or next year but just prefer to do it ASAP?
Yeah for other things my understanding is you need to withdraw in the same year as the expense was paid, so I’m assuming this is the same. I have just about $10k in loans left as of early this year so to get the full benefit I’d need to use it for this year’s payments too.
I fully understand your thinking. I just have not seen it mentioned anywhere. The Act certainly makes a point of saying it is retroactive to the beginning of 2019, but never mentions anything about the timing of withdrawals. I have not seen any article talking about any time urgency for this year. I also am concerned about 2019 tax software not being able to handle it, although there are always ways to make the tax program do what you want.
Mark

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Re: SECURE Act - 529 Plans

Post by Sam1 » Sun Dec 29, 2019 2:25 pm

Related, I get concerned that changes could be coming for inheriting 529 plans tax free. Just like what just happened for IRAs.

We’ve been told not to worry about overfunding a 529 because it can go to the next generation. This is a lot of money to pass on when who knows if my child will even have children. Now I get concerned that the tax rules could change. Is this a legitimate concern?

We don’t have access to in state schools. So we are talking at least 300k per kid in 529s.

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Re: SECURE Act - 529 Plans

Post by Mako » Sun Dec 29, 2019 3:29 pm

markcoop wrote:
Sun Dec 29, 2019 2:08 pm
I fully understand your thinking. I just have not seen it mentioned anywhere. The Act certainly makes a point of saying it is retroactive to the beginning of 2019, but never mentions anything about the timing of withdrawals. I have not seen any article talking about any time urgency for this year. I also am concerned about 2019 tax software not being able to handle it, although there are always ways to make the tax program do what you want.
According to this site: https://www.savingforcollege.com/articl ... d-expenses
529 plan distributions must be made during the same tax year that the qualified expenses are incurred. This is not an official IRS rule, but it is implied by published IRS guidance. Tax professionals and other experts agree that 529 plan distributions should match up with qualified expenses.

This intended to prevent potential abuse where 529 plan account owners let their funds grow tax-deferred for an extended period of time before taking a distribution to pay for previous expenses. The longer funds are held in a 529 plan account, the greater the financial benefit.
The logic makes sense and would seem to apply equally here.

As for the software handling it, I haven't done a 529 distribution yet so don't know how they handle it. But my assumption/hope was that you don't need to prove in the return (or the software) that what you are doing is legit, you just need the proof in case you get IRS questions or audited. Much like HSA withdrawals. So I would just say in the software that my distribution of $2500 or whatever matches with $2500 or whatever qualified expenses, which seems perfectly fine due to the change in law. But I don't know for 100% sure.

I recognize I'm taking a bit of a risk here as this is all kind of fly by the seat of my pants given the late in the year date of the change in law and little online discussion so far. Seems like the risk isn't that terrible though.

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Paying Spouse's Student Loans with 529

Post by travelogue » Sun Dec 29, 2019 5:19 pm

[Merged into ongoing discussion -- moderator oldcomputerguy]

As I understand it, provisions of the SECURE Act, which was signed into law on December 20, expanded the definition of a "qualified higher education expanse" to include amounts paid as principal or interest on any qualified education loan. We are still paying off my wife's student loan debts, and because of our AGI we can't deduct any student loan interest.

We live in MD, which allows $2,500 in contributions to be deducted from MD income per 529 beneficiary. I'm thinking we should now run all of our contributions to her student loans through a Maryland 529 account I will set up for her to take advantage of the state income tax deduction up to the $10,000 lifetime cap.

Does this make sense? Anyone else planning to take this approach?

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Re: Paying Spouse's Student Loans with 529

Post by travelogue » Sun Dec 29, 2019 5:44 pm

One possible snag, it seems -- we need to see whether MD will allow a deduction for this kind of distribution.

https://www.cnbc.com/2019/12/27/you-may ... -debt.html

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Re: SECURE Act - 529 Plans

Post by FedLawyerandBaller » Sun Dec 29, 2019 9:03 pm

I agree with you Mako, and I have done the same thing. I am just waiting for my funds that I invested in my newly created 529 for myself to become available so I can request the distribution for the $2k in loans that I paid in 2019 in time before the calendar year rolls over.

I 100% agree and read that same guidance on savingforcollege. Markcoop, I don’t quite follow why you would think that loan payments (which are now QHEEs) in year X could be reimbursed in year X+1 if that is not the prevailing guidance for all other QHEEs.

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Re: SECURE Act - 529 Plans

Post by markcoop » Sun Dec 29, 2019 9:50 pm

FedLawyerandBaller wrote:
Sun Dec 29, 2019 9:03 pm
I 100% agree and read that same guidance on savingforcollege. Markcoop, I don’t quite follow why you would think that loan payments (which are now QHEEs) in year X could be reimbursed in year X+1 if that is not the prevailing guidance for all other QHEEs.
I totally agree with you guys. I just haven't seen one article mention it. And unless they make updates to tax software, it won't handle it as well.

One other point. You would also think they would give the states some time to respond to this act. By saying it is retroactive to Jan 1 2019, not give the states a real chance to respond and then make people do it within a few days at the end of the year is not very fair.
Mark

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Re: SECURE Act - 529 Plans

Post by wineandplaya » Sun Dec 29, 2019 11:40 pm

Fwiw, I'm planning to use the new 529 student loan provision for a secondary emergency fund. I'm putting $9k-ish for myself and $9k-ish for my wife and invest in an interest bearing but close to risk-free investment. In the unlikely event that we have to use the emergency funds we'll pay the 10 % penalty on the (very small) earnings. Plus pay back the state tax deduction. Otherwise (more likely) we'll use the 529 accounts to pay down or off our student loans when the time comes. We're not in a hurry to pay them down since our current interest rates are just 0.16 % (my, foreign student loans) and 0 % (her federal loans as long as she is in graduate school), respectively.

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Re: SECURE Act - 529 Plans

Post by mcraepat9 » Mon Dec 30, 2019 5:45 pm

From NYS's 529 site:

Federal Tax Update
On December 20, 2019, the federal Further Consolidated Appropriations Act of 2020 was signed into law. It includes new provisions that allow 529 Plan account owners to withdraw assets to pay for certain apprenticeship programs and to pay principal and interest on qualified higher education loans for the beneficiary or any of the beneficiary’s siblings. The loan repayment provisions apply to repayments up to $10,000 per individual. These withdrawals will have no federal tax impact. It has not yet been determined whether these types of withdrawals will have New York State income tax consequences.

This Act is effective for distributions made after December 31, 2018. The new federal law continues to be evaluated as does the tax impact in New York. Additional updates will be posted on this website. Account owners are encouraged to consult a qualified tax advisor about their personal situations.
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Re: SECURE Act - 529 Plans

Post by markcoop » Mon Dec 30, 2019 10:28 pm

mcraepat9 wrote:
Mon Dec 30, 2019 5:45 pm
From NYS's 529 site:

Federal Tax Update
On December 20, 2019, the federal Further Consolidated Appropriations Act of 2020 was signed into law. It includes new provisions that allow 529 Plan account owners to withdraw assets to pay for certain apprenticeship programs and to pay principal and interest on qualified higher education loans for the beneficiary or any of the beneficiary’s siblings. The loan repayment provisions apply to repayments up to $10,000 per individual. These withdrawals will have no federal tax impact. It has not yet been determined whether these types of withdrawals will have New York State income tax consequences.

This Act is effective for distributions made after December 31, 2018. The new federal law continues to be evaluated as does the tax impact in New York. Additional updates will be posted on this website. Account owners are encouraged to consult a qualified tax advisor about their personal situations.
Does anyone think there is any chance NY will determine anything before 2019 NY taxes are due?
Mark

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Re: SECURE Act - 529 Plans

Post by mcraepat9 » Tue Dec 31, 2019 12:55 am

Seeing how long it to NYSDTF to respond to the TCJA, no.
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Re: SECURE Act - 529 Plans

Post by markcoop » Tue Dec 31, 2019 9:51 am

mcraepat9 wrote:
Tue Dec 31, 2019 12:55 am
Seeing how long it to NYSDTF to respond to the TCJA, no.
If the state does not respond, does that mean it will be considered a non-qualified withdrawal? Or are we on our own to conclude whether this federal qualified withdrawal is also a state qualified withdrawal?
Mark

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Re: SECURE Act - 529 Plans

Post by THY4373 » Tue Dec 31, 2019 10:59 am

FedLawyerandBaller wrote:
Sun Dec 22, 2019 7:51 pm
I was about to post this exact same question. I’ve completed school, and have about 9900 left in student loans. It seems like I should open an account for myself, fund it for max state tax deductibility (4K in Virginia) and then pay the loan from that. Any leftovers I can just give to my kids.
Actually VA is more generous than that. See this old thread on Bolgeheads for more details: viewtopic.php?t=87220 .

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Re: SECURE Act - 529 Plans

Post by UpsetRaptor » Tue Dec 31, 2019 11:43 am

markcoop wrote:
Tue Dec 31, 2019 9:51 am
mcraepat9 wrote:
Tue Dec 31, 2019 12:55 am
Seeing how long it to NYSDTF to respond to the TCJA, no.
If the state does not respond, does that mean it will be considered a non-qualified withdrawal? Or are we on our own to conclude whether this federal qualified withdrawal is also a state qualified withdrawal?
They will respond, just not in calendar year 2019. When they do respond, then we'll know, and can determine if any action performed in 2019 is valid or subject to recapture.

So let's say you took a state tax deduction/credit on 529 funds at some point in the past, then used 529 funds for loan repayment in 2019, and your state later decides that's fine. Great, no issues, you saved some state taxes. However, if the state later decides that's not allowed, then the tax situation becomes more complicated, as the state would claw back those deductions/credits you took. This happened with the 529 K-12 rules in TCJA too. I believe 37 states + DC ended up following the federal guidance and allowed K-12 529 usage with no state issues, while 3 - New York, Oregon, and Vermont - did not and so those state deductions were subject to later recapture.

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Re: SECURE Act - 529 Plans

Post by MichCPA » Tue Dec 31, 2019 11:59 am

livesoft wrote:
Sat Dec 21, 2019 5:03 pm
5. How do you think states will change their 529 plans with respect to state income taxes because an entire new way to avoid state taxes has been invented without the permission of the affected state governments?
In most states, the deduction is for contributions. The question is whether a state's rules are already setup for federal conformity or whether there is a rule making process required to change the definition of a qualified withdrawal.

I seem to remember about 40% to half are conforming and the other half would need either a legislative or administrative update. The 10k cap for a lifetime makes it hard to see a state throwing a major fit. In most circumstances, the lifetime tax benefit will be less than $1k.

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Re: SECURE Act - 529 Plans

Post by papito23 » Tue Dec 31, 2019 4:20 pm

Bumping this to remind someone who edits the 529 wiki (not me) to put in a note about the SECURE act.

Unless - given all the uncertainly about state tax implications - it's too early.
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Re: SECURE Act - 529 Plans

Post by privateID » Mon Mar 02, 2020 10:42 am

mcraepat9 wrote:
Mon Dec 30, 2019 5:45 pm
From NYS's 529 site:

Federal Tax Update
On December 20, 2019, the federal Further Consolidated Appropriations Act of 2020 was signed into law. It includes new provisions that allow 529 Plan account owners to withdraw assets to pay for certain apprenticeship programs and to pay principal and interest on qualified higher education loans for the beneficiary or any of the beneficiary’s siblings. The loan repayment provisions apply to repayments up to $10,000 per individual. These withdrawals will have no federal tax impact. It has not yet been determined whether these types of withdrawals will have New York State income tax consequences.

This Act is effective for distributions made after December 31, 2018. The new federal law continues to be evaluated as does the tax impact in New York. Additional updates will be posted on this website. Account owners are encouraged to consult a qualified tax advisor about their personal situations.
NYs website appears to have been updated. It now says the following:
"On December 20, 2019, the federal Further Consolidated Appropriations Act of 2020 (including portions of the Setting Every Community Up for Retirement Enhancement [SECURE] Act of 2019) was signed into law. It includes new provisions that allow 529 Plan account owners to withdraw assets to pay for certain apprenticeship programs and to pay principal and interest on qualified higher education loans for the beneficiary or any of the beneficiary's siblings. The loan repayment provisions apply to repayments up to $10,000 per individual. These withdrawals will have no federal tax impact.

Under New York State law, these distributions are considered nonqualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions. NY 529 account owners in other states should seek guidance from the state in which they pay taxes. This Act is effective for distributions made after December 31, 2018. Account owners are encouraged to consult a qualified tax advisor about their personal situation."


Sounds like NY has determined that withdrawals allowed by the SECURE Act will have New York State income tax consequences.

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Re: SECURE Act - 529 Plans

Post by Thrif-t » Mon Mar 02, 2020 5:35 pm

I wonder how long states have to decide about this?

I have a dd graduating this year and I would run her loan pay'ts up to 10k through the 529 if I'm going to be able to get the state tax deduction, Ohio.

Her loans won't be due till December 2020, I won't make any deposits until closer to the end of the year so we don't get bit.

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Re: SECURE Act - 529 Plans

Post by privateID » Tue Mar 03, 2020 9:32 am

What was worse was having to decide last year whether to use 529 for loan payments when clearly the states had no clue what they were going to do. I did not see any official announcement from NY State. Just happened to be on there website and noticed the new wording.

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Re: SECURE Act - 529 Plans

Post by inbox788 » Tue Mar 03, 2020 12:22 pm

I just came across this new loan payback option and got excited until I found my state penalties pretty much make it a nonstarter for me. So it seems QHEE is defined and now redefined differently by federal and state authorities. When I was learning about UTMA, I came across the ULC, which has been helpful in simplifying these cross boundary issues. This is one more thing I hope they take up and simplify. A little choice is good, but too much choice is just confusion, and for me too many things have gotten far more complicated than necessary.

https://en.wikipedia.org/wiki/Uniform_Law_Commission

[It's a bit like governments giving incentives to buy electric cars, so they don't burn gas, and then taxing electric cars because you don't buy gas and pay fuel taxes.
https://www.marketwatch.com/story/state ... 2019-12-30
It's all like a game of musical chairs, but there is only one chair. So if you're lucky enough to enjoy the benefits for the short duration, take advantage of the situation, while more and more people go around and around.]

FWIW, if anyone does use this in California or Scholarshare or similar state situation, please share your experience. I'm at a loss figuring out cost basis from multiple year contributions, variable growth, partial withdrawal, and what tax and student loan implications there are to me and the benefactor.

If the recipient is on income based repayment, would this program count as gift or income? And thus impact the repayment schedule? From what I understand, at the federal and state tax levels, this is simply considered a gift, correct? And no reporting is required if its under the annual limit.

inbox788
Posts: 7074
Joined: Thu Mar 15, 2012 5:24 pm

Re: SECURE Act - 529 Plans

Post by inbox788 » Tue Mar 03, 2020 1:01 pm

mcraepat9 wrote:
Sat Dec 21, 2019 4:59 pm
1. Is the $10,000 student loan cap per beneficiary (even if many different people have 529 plans for one beneficiary)? Or by contributor? Does the contributor need to be related to the beneficiary? The reference to siblings was throwing me off.
I'm pretty sure the limit is by beneficiary. I'm confused by everything else. ("amount of distributions treated as a qualified higher education expense under this paragraph with respect to the loans of any individual shall not exceed $10,000")

https://www.congress.gov/bill/116th-con ... 218DE553D7
SEC. 302. EXPANSION OF SECTION 529 PLANS.

“(b) Distributions For Qualified Education Loan Repayments.—

(1) IN GENERAL.—Section 529(c) of such Code, as amended by subsection (a), is amended by adding at the end the following new paragraph:

“(9) TREATMENT OF QUALIFIED EDUCATION LOAN REPAYMENTS.—

“(A) IN GENERAL.—Any reference in this subsection to the term ‘qualified higher education expense’ shall include a reference to amounts paid as principal or interest on any qualified education loan (as defined in section 221(d)) of the designated beneficiary or a sibling of the designated beneficiary.

“(B) LIMITATION.—The amount of distributions treated as a qualified higher education expense under this paragraph with respect to the loans of any individual shall not exceed $10,000 (reduced by the amount of distributions so treated for all prior taxable years).

“(C) SPECIAL RULES FOR SIBLINGS OF THE DESIGNATED BENEFICIARY.—

“(i) SEPARATE ACCOUNTING.—For purposes of subparagraph (B) and subsection (d), amounts treated as a qualified higher education expense with respect to the loans of a sibling of the designated beneficiary shall be taken into account with respect to such sibling and not with respect to such designated beneficiary.

“(ii) SIBLING DEFINED.—For purposes of this paragraph, the term ‘sibling’ means an individual who bears a relationship to the designated beneficiary which is described in section 152(d)(2)(B).”.

(2) COORDINATION WITH DEDUCTION FOR STUDENT LOAN INTEREST
From the horses mouth, 302a8 uses QHEE ("qualified higher education expense") for registered apprenticeship programs. I believe 302b9A make "qualified education loan repayments" QHEE. 302b2 addresses the problem of double dipping into subsidized student loan interest and 529 tax benefits. I don't understand what all the sibling language is designed to fix. Couldn't the parent or grandparent or anyone really just open a new separate account for a beneficiary and transfer funds from another account (different account owner and/or beneficiary)? Best I could tell, there was some trust language that it might be referring to, but if that's the case, you should probably be consulting an attorney. Actually, given the clarity (clear as mud) of these clauses, we would all benefit from professional legal interpretation. Anyway, the main benefit I see of this sibling language is that you can just use the current account without jumping through the hoop of opening up a new account to achieve the same thing.

https://www.law.cornell.edu/uscode/text/26/529

wineandplaya said, "My state requires 529 funds to have been in the account for at least 365 days before reimbursement.", but I didn't find any legal language that required that. It's a problem if you're in that state, but with loans being paid out over multiple years, some folks might benefit from investing an extra year invested, statistically arbitraging higher return with lower or subsidized interest rates.

Mako
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Re: SECURE Act - 529 Plans

Post by Mako » Tue Mar 03, 2020 2:01 pm

Thrif-t wrote:
Mon Mar 02, 2020 5:35 pm
I wonder how long states have to decide about this?
They will surely need to soon as people are going to be making taxable events. Some people may have even done so at the end of last year and will need answers for filing this spring.

My state (Maryland) has already acknowledged that student loan payments are a qualified education expense. I believe they simply follow the federal definition of qualified, so if your state simply follows the federal you are more likely in luck.

Maybe asking directly would help, but maybe not. FWIW, Maryland's website did not change right away, I emailed them right after the law changed and got no reply, but then it changed maybe a month ago.

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