Tax reform 2.0 would allow parents to pay off student loans with 529 plans

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Kathryn Flynn

By Kathryn Flynn

July 25, 2018

House Republicans released an outline of “tax reform 2.0”, which builds on the Tax Cuts and Jobs Act signed by President Trump in 2017. This proposal may not pass in its entirety, but it’s important to understand how these changes could affect your family’s college savings strategy. Here are some of the key issues related to family savings: 

Universal Savings Accounts 

The plan proposes establishing an account that offers tax-free savings regardless of how the funds are used. Some families are hesitant to use 529 plans because they aren’t sure whether or not their child will go to college. USA accounts could offer a more flexible alternative, but they will likely have contribution limits. 

Further expansion of 529 plan benefits 

529 plans allow families to save in a tax-advantaged account for education costs. Earnings grow tax-free and are not taxed when the funds are used to pay for qualified education expenses. 529 plans were traditionally used to save for college, but the Tax Cuts and Jobs Act of 2017 included a provision to allow up to $10,000 of elementary, middle or high school tuition as a qualified expense. House Republicans had also proposed including homeschooling costs and apprenticeship fees as qualified expenses, but these items were not included in the final tax law. 

However, tax reform 2.0 reintroduces the idea of making home schooling and apprenticeship expenses qualified, and also proposes allowing tax-free 529 plan withdrawals to pay down student loans. By paying off student loan debt using leftover 529 plan money, young parents can start to focus on saving for emergencies, retirement and their own children’s college education. 

Increased flexibility with retirement savings 

Tax reform 2.0 would allow parents to withdraw funds tax-free from a retirement account when they have a new baby (by birth or adoption). Distributions for new baby expenses would also avoid the 10% early withdrawal penalty that normally applies to IRAs.

A good place to start:

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