Question: Can I use 529 plan funds to pay off student loan debt?
Answer: As a result of the SECURE Act that was signed into law on December 20, 2019, families with 529 college savings plans now have more options when it comes to using 529 funds. Now you can use some of your 529 savings (previously only usable for qualifying college expenses and K through 12 tuition), to pay off student loan debt without incurring a penalty.
If you are lucky enough to have some ‘extra’ 529 plan funds after graduation, there is a way to use these funds before cashing out and paying a 10% penalty on the earnings.
However, this new perk does have limitations. For example, families with 529 college savings plans are limited to withdrawing up to $10,000 tax-free for use toward qualified education loans. Also, note that the $10,000 limit is per lifetime, but it can apply to more than one dependent. If a family has three kids with student loan debt, for example, they could withdraw $10,000 in tax-free funds for each child from their 529 plans for a total of $30,000.
Comment: There are potential consequences of paying off student loan debt with 529 money. One issue to recognize is that people who go this route may miss out on important tax deductions for student loan interest. It is also possible that while paying off student loan debt is permissible for federal purposes, some states (while unlikely) could disallow a state income tax deduction taken upon funding the 529 plan or may try to apply a penalty to what they deem to be a non-qualified distribution. Interest paid from the 529 for student loan debt isn’t tax-deductible under the student loan interest debt provisions.
All in all, whether to use 529 plans to pay down student loan debt will depend on factors such as a person’s tax situation, the interest rate one is paying on student loans and the opportunity cost of using the funds for something else.
As always, if you have any questions or would like to learn more, please contact Steve Shane at firstname.lastname@example.org or .
ABOUT STEVE SHANE
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts, and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.
ABOUT OFFIT KURMAN
Offit Kurman is one of the fastest-growing full-service law firms in the United States. With 14 offices in seven states, and the District of Columbia, and growing by 50% in two years through expansions in New York City and Charlotte, North Carolina, Offit Kurman is well-positioned to meet the legal needs of dynamic businesses and the individuals who own and operate them. For over 30 years, we’ve represented privately held companies and families of wealth throughout their business life cycles.
Whatever and wherever your industry, Offit Kurman is the better way to protect your business, preserve your family’s wealth, and resolve your most challenging legal conflicts. At Offit Kurman, we distinguish ourselves by the quality and breadth of our legal services—as well as our unique operational structure, which encourages a culture of collaboration and entrepreneurialism. The same approach that makes our firm attractive to legal practitioners also gives clients access to experienced counsel in every area of the law.
Find out why Offit Kurman is The Better Way to protect your business, your assets and your family by connecting via our Blog, Facebook, Twitter, Instagram, YouTube, and LinkedIn pages. You can also sign up to receive LawMatters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.
DELAWARE | MARYLAND | NEW JERSEY | NEW YORK | NORTH CAROLINA | PENNSYLVANIA | VIRGINIA | WASHINGTON, DC