In Part 1 of our blog series on the SECURE Act, we discussed changes to individual retirement plans. In this article, we will explore how the SECURE Act offers improved flexibility for college savings plans and provides financial relief options for new parents.
The new law provides some help for new parents: under the SECURE Act, a retirement plan distribution of $5,000 ($10,000 for parents filing jointly) may be withdrawn up to a year after the taxpayer’s child is born or a child is placed with the taxpayer for adoption. Ordinarily, such a withdrawal would result in a 10% penalty tax on early withdrawals of retirement funds; under the new law, such payments are income to the taxpayer but are not otherwise penalized.
After the Tax Cuts and Jobs Act (TCJA) was enacted, the tax on certain unearned income of children (otherwise known as the “kiddie tax”) was made more burdensome as a revenue-raising method to assist the TCJA in passing Congress. Under the post-TCJA rules, the unearned income of children was taxed at trust and estate rates, which have very compressed brackets and are hugely regressive.
This change revealed an unforeseen complication; children of deceased members of the US Armed Forces (sometimes called Gold Star children) were taxed at confiscatory rates on the death benefits they received. The SECURE Act corrected this oversight by reverting to the pre-2018 rules for tax years after December 31, 2019. The kiddie tax is now assessed not at high trust rates but at the tax rates of the child’s parents.
A common tool for education planning by parents today is the implementation of a qualified tuition program (also known as a 529 plan) to provide for their children’s college expenses or expenses for other higher education programs. Many states offer tax deductions for contributions to such plans. Money in 529 plans is earned tax-free and can be used tax-free to pay for tuition, fees, books, and other supplies and equipment to a qualified higher education provider.
The SECURE Act has expanded the acceptable uses of the plan to include payments for a beneficiary’s participation in a certified apprenticeship program. Additionally, up to $10,000 per student can be distributed to pay down student loans, and siblings of the plan’s beneficiary may qualify. With record rates of student loan debt in the United States, this is a boon to taxpaying students and their parents.
Proper tax planning can make all the difference for taxpayers who are trying to navigate the change in the new law, and we at MRPR stand ready to assist you. Please check out Part 1 for more information, and stay tuned for Part 3 where we will cover changes for small businesses.