By Sabrina Karl
It’s been 35 years since 529 college savings plans were first created, and still, many Americans don’t know what one is. But even if you count yourself among the parents familiar with these tax-friendly savings plans, you may be unaware that their allowed uses have been expanded in recent years.
A 529 plan allows you to contribute savings for a child’s future education expenses, invest those savings, let them grow tax-free, and then withdraw them tax-free if used for qualified higher education expenses.
But where notable changes have been made is in what counts as a qualified expense. College or trade school tuition, certain room and board allowances, books, computers, equipment, and supplies have always been covered, meaning a 529 withdrawal for these expenses incurs no tax hit and no penalty.
But two recent legislative acts have expanded that list of qualified expenses considerably. In 2017, the Tax Cuts & Jobs Act added the ability to spend 529 funds on K-12 education, meaning your younger child’s private school tuition is now eligible. One important caveat, however, is that K-12 withdrawals are capped at $10,000, whereas post-secondary education expenses carry no such cap.
More recently, the 2019 SECURE Act added the ability to use 529 funds to pay off student loan debt. The student loan payments can be on behalf of the beneficiary or any of their siblings. Once again, however, a limit applies: only up to $10,000 of student loan debt (per lifetime, per beneficiary) qualifies for tax- and penalty-free 529 withdrawals.
There is an important wrinkle to be aware of, however, in that not all 50 states have adopted the two federal laws in their plans. So where you hold your plan and where you live will determine whether you’ll personally qualify for these federal expansions.