Tax Tip on Student Loan

[Ashish Acharya]

The SECURE Act now allows for 529 Plan funds to be used to pay up to $10K of student loans. 

• Open a 529
• Contribute $10K and take a state tax deduction. Most states. 
• Distribute funds to pay off $10K of student loans. 

Detail below: 

• Qualified amounts paid as principal or interest on a qualified education loan (as defined in Code Sec. 221(d), of the designated beneficiary or a sibling of the designated beneficiary.11 A “sibling” means an individual who bears a relationship to the designated beneficiary that's described in Code Sec. 152(d)(2)(B) (i.e., a brother, sister, stepbrother, or stepsister)

• This rule allows a student loan distribution to be made from a QTP account to a sibling of the account's designated beneficiary without changing the designated beneficiary.

• The amount of distributions treated as a qualified higher education expense with respect to the qualified education loans of any individual can't exceed $10,000, reduced by the amount of distributions so treated for all prior tax years. NOTE: Distributions to pay loans of a sibling are taken into account separately from distributions to pay loans of the designated beneficiary for this purpose.

• The $10,000 limit is a lifetime limit and applies to student loan distributions to an individual from all QTPs. Thus, the limit can't be circumvented by receiving distributions from more than one account.

• In 2019, a $5,000 student loan distribution is made to A, the designated beneficiary of a QTP. Another $5,000 student loan distribution is made to B, A's sibling. Both A and B have $5,000 remaining on their lifetime limits.
•  If the $10,000 limit is exceeded, the earnings portion of the excess distribution is included in the individual's income and is subject to a 10% penalty.

• The deduction for qualified education loan interest is disallowed to the extent the interest was paid from a tax-free QTP distribution.

Consult with  your tax advisor.