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The New 529

In recent years, Congress has made two significant legislative changes that have had a material impact on the financial planning landscape. The two pieces of legislation are the Tax Cuts and Jobs Act of 2017, and the Secure Act, which was passed in late 2019. With such significant changes in such a short period of time, it's always good to take a step back and take stock of all of the changes. While there were some landmark changes such as the elimination of the stretch IRA, RMD (Required Minimum Distribution) age moved to 72 and the standard deduction was expanded. 

There was another less publicized change that was made, and I would be remiss to not address how 529 Plans can now be used.  In short, a 529 is a tax-advantaged plan designed to help pay for education. 529 Plans grow tax-deferred and withdrawals are tax-free if they are used for qualified educational expenses.  With the passing of the Secure Act in late 2019, 529 Plans now have the ability to pay up to $10,000 of student loan debt over the lifetime of the plan. That means not only can the plans be used in the traditional sense of tax-free distributions for higher education, but they can also be used to pay up to $10,000 of student loan debt.

The question is, why is this important to you and me? Like many of our fellow millennials, the college years are already behind us, and it is widely reported that our generation is strapped with student loan debt and repayments month to month. This change provides an opportunity for anyone who has student loan debt to make 529 contributions while getting the state income tax deduction and then make payments from the 529 on your student loans. For example, you can make a $10,000 contribution to a 529 with yourself as the beneficiary. You would receive a State of Michigan income tax deduction of $425, and then make the payment from your 529 to your student loans. With this strategy, the objective is not to get the tax-free distributions on the growth, but to receive the state income tax deduction on the contribution. The only rule is you have to do the contribution in one tax year and distribution in another tax year to receive the tax deduction. By making the contribution in December and doing the distribution in January the following year,  you fulfill this requirement.

Are you trying to make aggressive payments on student loans?  If so, this is certainly an effective new strategy that can be utilized to shelter income from state tax that did not exist prior to the passing of the Secure Act. 

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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Written by Kyle Cooper

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