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At the end of the year 2019, congress passed the SECURE Act. This act does many things relating to retirement accounts, but Section 302 specifically relates to 529 account expansions. These changes seem to explicitly state that student loans are eligible for payments from tax-advantaged 529 accounts.

As it stands currently, I'm paying my existing student loans from a non-tax-advantaged account (i.e. my bank account) and receiving no benefits from it. Could I put this money directly into a 529 a month in advance in order to circumvent having to pay taxes on my income that is devoted to student loan payments?

Example for clarity: I pay $300 a month to student loans. This money is taxed, and put into my debit account before I pay my loan. Could I instead place the $300 pre-tax into a 529 for myself, and pay back the loan from that?

Finally, if I am able to do this, would I be able to retroactively do this for 2019 as of today's date?

(Even if there's no obvious benefit here, my work does still offer a $200 yearly contribution to a 529 account if I open one)

Edit: As relating to state taxes, I live in PA, however I understand that I can make a 529 for any state, despite where I live.

Erin B
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2 Answers2

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529 Contributions are not tax advantaged at the federal level, just the earnings. If you put $1000 in your 529 account, then immediately use it to pay your loan, you don't get any benefit. If you put $1000 in an index fund and wait a year, you could end up with (say) $1050, and that extra $50 is non-taxed.

Your job's $200 yearly contribution is the real reason to do this. But, your state might tax-advantage 529 contributions.

In your case, because you live in PA, you could save $9/month in state taxes by doing this. (Using your example contribution of $300/month.

Nosjack
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user3757614
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The 2019 version of the IRS Publication 970 was just recently released, and it clarifies that you have to take the distribution from a Qualified Tuition Program (e.g. a 529 account) in the same year as the qualified education expense.

What is the tax benefit of a QTP?
No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses.

From the publication's Chapter 8 on Qualified Tuition Plans, under Figuring the Taxable Portion of a Distribution (adding italics for emphasis):

Taxable Earnings. Use the following steps to figure the taxable part.

  1. Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year.
  2. Subtract...

Generally, the numbers you're using are expected to come from forms like a 1099-Q or 1099-T. These forms report numbers for a specific tax year. Given the above wording, I conclude that your QTP distribution must be in the same tax year as a student loan payment in order to make the numbers match up as you'd expect.

kuloch
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