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Kids & Money: SECURE Act could help with college saving

Kids & Money: SECURE Act could help with college saving

  • Updated

Congress left families dealing with college savings issues a nice parting gift in the waning days of 2019.

In a worrisome environment dominated by impeachment proceedings against President Trump, unresolved trade negotiations with China and political posturing for the 2020 election year, Congress passed legislation in late December that could be a game changer for many households.

The SECURE Act — short for Setting Every Community Up for Retirement Enhancement — includes three key provisions that favorably impact saving and paying for college. The SECURE Act:

  • Allows 529 college savings plans to be used to repay up to $10,000 for qualified student loan repayments. That’s a lifetime limit. Under the new law, principal and interest payments toward a qualified education loan are now considered qualified 529 plan expenses.
  • Allows 529 plans to be used to pay for apprenticeship programs offered by employers in construction, health care, information technology and many other industries. Tax-free distributions from 529s can be used to pay for fees, textbooks, supplies and equipment associated with eligible apprenticeship programs, according to an analysis by Mark Kantrowitz, the publisher of SavingforCollege.com.

To be considered a qualified 529 expense, the apprenticeship program must be registered and certified with the Secretary of Labor. To learn whether an apprenticeship program is eligible, the labor department provides a search tool at apprenticeship.gov.

  • Rolls back changes to the so-called Kiddie Tax made in 2017 that affected the taxable portion of college scholarships and grants. Yes, those financial aid benefits are taxed by the federal government.

Under the old laws, those scholarships and grants were taxed at the same rates as estates and trusts. The new law reverts to the rules that were in place before 2018, taxing those college funds at the parent’s rate.

Kantrowitz said taxpayers can choose to have the change apply retroactively to the 2018 and/or the 2019 tax years. He said taxpayers will likely have to file amended federal returns to claim a refund of the excess tax.

The legislation also includes provisions that improves data sharing between the U.S. Department of Education and the Internal Revenue Service, which observers think will help simplify the Free Application for Federal Student Aid and streamline authorization for income-driven student loan repayment plans.

An earlier version of the SECURE Act included additional savings provisions with 529 plans, but those were later dropped last year. For example, those items would have allowed 529s to pay for homeschooling or educational therapy for students with disabilities.

Questions, comments, column ideas? Send an email to sbrosen1030@gmail.com

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