Student loans? Expecting a child soon? If yes, you now have more options.

February 5, 2020

At the end of 2019, a bill updating the tax code was signed into law. There might be some money in it for you.

If you answer yes to the questions below, you stand to benefit from the SECURE Act.

Do you have student loans?

A 529 account is a way to save money for education. You might think of it as a 401(k) for college (note: you can actually use it for tuition as soon as kindergarten). You may save money on state taxes when you contribute. And, if you invest those contributions, you avoid taxes on any investment gains. You don’t even pay taxes when you withdraw money, unlike a traditional 401(k), where you do.

However, in order to make sure people are using these accounts as intended, the government has a specific set of expenses you can spend these savings on. For example, tuition, on-campus meal plans, and textbooks count. Netflix, Uber, and pizza deliveries don’t. The new law adds to the list of what you can spend your 529 money on. You can now use up to $10,000 held in a 529 savings account to repay student loans or pay for an apprenticeship (note, however, that you may have to pay state taxes when you take money out for this purpose). If you’re feeling generous, you can even use up to $10,000 to pay your sibling’s student loans. So be nice to your sister.

Do you expect your family to grow?

Money in your retirement account is usually off limits until you retire. If you take out money too soon, you’ll pay a penalty to the IRS equal to 10 percent of the amount you took out, plus the usual taxes. This is the government’s way to keep your hands out of your own cookie jar. Only the cookie jar in this case is a 401(k), 457(b), IRA, or other retirement account.

But let’s say you have a baby or adopt a child. You are now allowed to withdraw up to $5,000, penalty free (within a year of giving birth or adopting). If you’re married, each spouse can withdraw $5,000. Some experts would argue that you should try to pay for expenses in other ways before you dip into retirement savings—just because you can doesn’t mean you should. But the increased flexibility should make parents breathe a little easier, knowing there’s an additional financial backstop, should they need it.

Everybody else

So, if you don’t have student loans and aren’t expecting any new children after 2020, did you miss out? Not exactly. The SECURE Act also gives additional flexibility to individuals later in their careers, but we’re not going to get into those details now. You’ll just need to wait a little while before you can see the benefits of this law in action.