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Opening a 529 to pay my own student loans

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  • Opening a 529 to pay my own student loans

    I live in one of the states that allows a tax break for my full contribution to my 529 plan. (New Mexico)
    The SECURE act apparently allows one to use the 529 to pay student loan debt up to a lifetime limit of $10,000. Am I correct that I can just open up a 529 and contribute $10,000, take the tax break, then turn around and use it to pay my own student loan?

  • #2
    I am definitely not an expert on this, but the biggest consideration is whether or not your state went ahead to change it's own rules to allow for this. The federal rule didn't change each state's rules, but allowed for the states to decide themselves.

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    • #3
      It's a little confusing. The FAQs suggest one can actually use up to $10,000 for student loan repayments. However, they always reference the beneficiary or siblings.

      "Federal law allows you to withdraw up to $10,000 free from federal taxes in order to pay the principal or interest on a qualified education loan of the beneficiary or a sibling of the beneficiary. If you pay off student loan interest with a 529 plan distribution, it will not be eligible for the federal student loan interest deduction. " The problem with federal student loan interest deduction is it caps at a very low MAGI.

      https://www.theeducationplan.com/faqs

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      • #4
        Originally posted by wcinewbie View Post
        I live in one of the states that allows a tax break for my full contribution to my 529 plan. (New Mexico)
        The SECURE act apparently allows one to use the 529 to pay student loan debt up to a lifetime limit of $10,000. Am I correct that I can just open up a 529 and contribute $10,000, take the tax break, then turn around and use it to pay my own student loan?
        I did this too, since my state allows a tax deduction on contributions. The 529 plan administrators were very helpful. They clarified that the only stipulation was, the funds needed to be withdrawn in a different calendar year than they were deposited. So I funded the 529 in late December and then withdrew the funds in early January. Quick and easy tax break worth hundreds of dollars!

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        • #5
          What state are you in?

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          • #6
            I live in NY and they specifically state on their 529 website that there is NO state tax deduction for using these towards student loans. So I could open a 529 account and pay off loans directly with it, but there just isn't any tax benefit than direct deposit from my bank account.

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