529 Plan Updates and the Secure Act
By Krupa Patel
Tax-favored savings accounts such as Georgia’s Path2College 529 were designed to help families save for future college expenses. But until now, these funds could not be used to repay student debt. With the Secure Act, a law attached to broader federal spending legislation enacted in December, 2019 and aimed mainly at adjusting the nation’s retirement system, the government has expanded allowable uses for 529 funds.
With all of the uncertainty that is happening around us, what better way to ensure your child’s future than by investing in a 529 plan. As a result of the Secure Act, Georgia’s tax benefit for 529 plans has gotten better. Effective January 1, 2020, the state tax deduction increased from $2,000 to $4,000 per year per beneficiary, for single taxpayers, and from $4,000 to $8,000 per year per beneficiary, for married filing jointly tax filers. Also, 529 plans can now be used to pay for k-12. Please note that a separate 529 plan will need to be established for each beneficiary (one 529 plan cannot be used to pay for multiple beneficiaries). Savingforcollege.com estimates, from the day a child is born, $25 to $35 a month should be contributed for each $10,000 of educational expense. The 529 plan is a perfect way to contribute towards your child’s future education expense now and receive a state tax benefit at the same time.
Grandparents can also contribute to 529 plans for their grandchildren. A grandparent can either contribute to the plan owned by the child’s parents or they can set up their own plan by listing the grandchild as the beneficiary. With setting up their own accounts, grandparents have control over the assets, as well as get a state tax benefits from the contribution. However, one downfall of grandparents opening their own accounts is the effect that it has on the grandchild’s financial aid. With a 529 plan owned by the parents, only 5.64% of the contribution counts towards the beneficiary’s expected family contribution when filling out the FAFSA. If grandparents own the 529 plan, the contribution is reported as the grandchild’s own income which will reduce the financial aid award by 50%. The funds can be used tax-free for education related expenses, such as tuition, room and board, books, supplies, and equipment required for enrollment and attendance at an eligible educational institution. If for some reason, the beneficiary does not attend college, you can withdraw the funds with a 10% withdrawal penalty and pay the taxes on any earnings withdrawn
There are many more reasons to invest in a 529 right now. With the Secure Act, up to $10,000 from a 529 account can be used to repay the beneficiary’s students loans. Plus, another $10,000 each can be used to repay student loans held by the beneficiary’s siblings. The new law also allows 529 funds to be used to pay for apprenticeships, which typically combine on-the-job training with the classroom instructions. In order to qualify, the apprenticeship must be registered with the federal Labor Department. No matter who owns the plan or who contributes to it, any funds invested right now, will grow and help your children or grandchildren prepare for the future.
For assistance with this or any other tax matter, please contact us directly at 404-255-7400 or info@hoffmanestatelaw.com.
