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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.

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2 Answers 2

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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.

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    You link indicates the contributions may be tax advantaged at the state level. If the OP lives in such a state and the state has a high rate of tax it may be advantageous.
    – AllInOne
    Commented Jan 13, 2020 at 17:35
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    The state you live in? If I open a 529 in a different state, I can potentially get an advantage on that state's taxes, but I don't pay taxes in that state.
    – user3757614
    Commented Jan 13, 2020 at 18:11
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    Ah, PA. In that case you could save $9/month in state taxes by doing this. (Using your example contribution of $300/month.)
    – user3757614
    Commented Jan 13, 2020 at 19:07
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    That's terrific, and exactly what I was looking for! Can you please add that to your answer! I think that will really illustrate the difference between states for other users!
    – Erin B
    Commented Jan 13, 2020 at 20:05
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    Also remember that you cannot claim the student loan interest deduction for interest paid with a 529 account (as it's considered a tax-advantaged account). Depending on your tax bracket and how much of each payment is interest, it may be that the federal student loan interest deduction will net you more than your state deduction on the relevant 529 contributions. However, I can't find anything that clearly indicates whether you can legally claim the full $2500 maximum student loan interest deduction and use 529 contributions for the rest - though it's much more calculating. Any thoughts?
    – kuloch
    Commented Jan 14, 2020 at 18:23
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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.

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  • Great source! To summarize; are you saying that I wouldn't be able to do this, then, since my student loans are over a year old?
    – Erin B
    Commented Jan 23, 2020 at 19:41
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    Based on how I read the 2019 Pub 970, you can't do anything in 2020 to affect your 2019 numbers for QTP distributions and qualified education expenses. You can, however, apply your newfound knowledge here in 2020. You could in December set up a 529 plan, contribute the value of your 2020 student loans, and (after the plan-required minimum time) withdraw that amount (still in 2020) as a qualified education expense. You may also be interested in the question that this thread led me to ask
    – kuloch
    Commented Jan 23, 2020 at 20:17
  • Great question! Thank you for the link! I would've missed it otherwise!
    – Erin B
    Commented Jan 23, 2020 at 21:00
  • @kuloch, can you expand on why you think loans don't qualify, but "certain expenses like tuition offer some degree of flexibility" [with respect to which year the expense occurs vs which year the offsetting 529 withdrawal occurs]? My reading indicates that QHEE's are all the same. Used to be just tuition and education expenses, now the set of QHEE's includes student loan payments. If tuition from a previous year can be aligned with a current year 529 withdrawal, then why not all QHEE's?
    – Dale
    Commented Mar 7, 2020 at 20:03
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    @Dale, that's a good question. First, I'm not an accountant and cannot verify that my reading is correct. However, I added another quote from Pub. 970 to my answer above, which specifically talks about using expenses paid and amount distributed "during the year". There are also multiple places that indicate only being able to use a QHEE paid in that tax year - specifically when paid rather than when billed, so prepaid tuition for a following year counts in the year paid (e.g. 2019 if paid on Dec. 31 2019 for March 2020 tuition).
    – kuloch
    Commented Mar 9, 2020 at 17:33

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