SECURE Act Changes to Education Savings Plans

SECURE Act changes to college savings plans may help reduce future skilled labor shortages and expand families’ education savings options. We wrote last month about the changes to IRA rules created by the ‘Setting Every Community Up for Retirement Enhancement Act of 2019” (SECURE Act).

This month we are exploring social problems threatened by the “Baby Boomer” generation’s looming retirement and how the SECURE Act offers tax incentives to help reduce those problems.

Baby Boomer Retirement Problem

• Baby Boomer Generation

The US Bureau of Labor Statistics (BLS) refers to the Baby Boomer generation as those people born between 1946 and 1964. BLS data shows that 23 percent of people in the US workforce were 55 years of age or older in 2018 and the data projects that the percentage will rise to 25 percent by 2028.

Some economists fear that skilled labor shortages will emerge as much of the Baby Boomer generation retires this decade.

• Labor Shortage as Baby Boomers Retire

The apprenticeship expansion of 529 plans may help curb skilled labor shortages by attracting people into apprenticeship training programs. Parents and grandparents should consider 529 plan investments to help young family members pursue interests in these kinds of careers as alternatives to savings for traditional college education.

SECURE Act Changes to Education Savings Plans

SECURE Act changes to education savings plans extend the tax benefits of savings plans known as “529 plans” to students enrolled in registered apprenticeship programs under the National Apprenticeship Act. 529 plans established under Section 529 of the Internal Revenue Code help people save money to pay future educational costs for their children and grandchildren.

529 Plan Overview

Money invested in a 529 plan grows without income taxation much like an IRA protects earnings on retirement savings from taxation. Unlike ordinary IRA withdrawals, however, which are fully taxable, 529 plan owners can withdraw 529 plan funds tax-free to pay “qualified higher education expenses.” 529 plan owners may also claim some state income tax credits as state rewards for investing in 529 plans. A 529 plan owner may not contribute more than the annual gift tax exclusion amount ($15,000 in 2019 and probably also in 2020) for any individual beneficiary in one year, but there is no limit to growth in the plan’s value from investment earnings.

Qualified Higher Education Expenses Include Apprenticeship Expenses

SECURE Act Section 302 expands the definition of “qualified higher education expense” to include an apprentice’s expenses for fees, books, supplies and equipment required in an apprenticeship program registered and certified with the Secretary of Labor. This change allows people to help their younger family members purchase training materials, tools and supplies for training as carpenters, electricians and other occupations that feature apprenticeship training systems.

Qualified Higher Education Expenses Include Payments on Qualified Education Loans

The SECURE Act also expands the “qualified higher education expense” definition to include payments of principal or interest on qualified education loans. The change allows people to use 529 plan funds to help pay student loan debt. The law does not limit direct payments of qualified higher education expenses, but 529 plan funds paid on student loans of a beneficiary or a beneficiary’s siblings must not exceed a lifetime total of $10,000.

About the Authors

Jeff R. Hawkins and Jennifer J. Hawkins are Trust and Estate Specialty Board Certified Indiana Trust and Estate Lawyers. They are also active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys.

Both lawyers are admitted to practice law in Indiana and Jeff Hawkins is admitted to practice law in Illinois.

Jeff is a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation. He is also a member of the Illinois State Bar Association and the Indiana Association of Mediators. He served as the 2014-15 President of the Indiana State Bar Association and he is a registered civil mediator.

Hawkins Elder Law is one of the few elder law firms that Martindale-Hubbell TM has rated AV Preeminent, with both of the firm’s lawyers (Jeff Hawkins and Jennifer Hawkins) also rated AV Preeminent.

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