This content was published prior to the combination of Dentons Davis Brown. Learn more about Dentons Davis Brown. 

Included in the federal Further Consolidated Appropriations Act 2020 signed by the president on December 20, 2019, is the SECURE (Setting Every Community Up for Retirement Enhancement) Act (the “Act”), a law expanding the types of expenses for which funds in a 529 college savings account can be used without losing favorable federal tax treatment.

The Act expands the 529 college savings plan program to permit certain apprenticeship program expenses and student loan repayments to be treated as “qualified higher education expenses.” Account owners can now withdraw assets to pay such apprenticeship program expenses or loan repayments and treat the withdrawals as qualified expenses with respect to the federal tax benefit.

Apprenticeship Program Fees

Withdrawals for certain expenses related to approved apprenticeship programs are now allowed. Individuals will be able to use their 529 accounts to pay for fees, books, supplies, and equipment required to participate in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act.

Student Loans

The Act also provides that amounts paid as principal or interest on any qualified education loan of the beneficiary or a sibling may be treated as a “qualified higher education expense.” However, the total cumulative amount in all years that may be used from all accounts for repayment of loans of an individual may not exceed $10,000.  

Borrowers should note that loan repayments paid with 529 account funds will reduce the amount of allowed student loan interest deduction to which the taxpayer might otherwise be entitled.

State Guidelines

Many states permit a deduction, within limits, for contributions to college savings accounts. The state tax treatment of withdrawals for apprenticeship expenses or loan repayments will be determined by an account owner's state of residence.

In Iowa, it will take an act of the legislature to extend the favorable Iowa state tax treatment to withdrawals for apprenticeship expenses or loan repayments. If a withdrawal is not qualified for state tax purposes, it would trigger a deduction recapture in many of the states that permit a deduction for contributions to a college savings account.

These provisions apply to distributions made after December 31, 2018.