In college, Debt, Earnings, Retirement

Senator Rand Paul introduced a bill, the Higher Education Loan Payment and Enhanced Retirement (HELPER) to allow individuals to pay student loans with pretax money.  If this bill passes, it would allow for the following changes to the current law.

Tax Issue Current  Proposal
Retirement Withdrawals for Education  Distributions from retirement accounts for higher education may be subject to income taxes and early withdrawal penalties (some exceptions apply). Allow individuals to withdraw $5,250 annually from retirement accounts without penalties or taxes to pay for student loans or education.  This includes spouses or dependents.  
Student Loan Interest 

Deduction 

Individuals are able to deduct up to $2,500 on their personal tax returns for student loan interest.  However, this amount phases out for individuals who earn MAGI $85,000 ($170,000 joint filers) Individuals would be able to take a deduction without limitation.  In addition, individuals would not be subject to income limitations. 
Retirement Flexibility Current 401(k) plans are pretax, thus individuals pay taxes during their retirement years on withdrawals. Individuals would have the option to treat 401(k) plans as a Roth IRAs.  This would allow savings to grow tax-free and eliminate paying taxes during retirement. 

Withdrawals for education expenses 

Current Law: Under the current law, generally (there are some exceptions) individuals are subject to a 10% early withdrawal penalties if they withdraw from their retirement account before the age of 59 ½.  In addition, they are also subject to income taxes on withdrawals, subject to their personal tax bracket. Please note, there are some exceptions to the penalty

Proposed: Individuals would be able to take up to $5,250 from their individual retirement accounts or 401(k) plans without being subject to taxes or penalties for repayment.  In addition, the funds could also be used for tuition payments for the individual, spouse or dependent. 

Student Loan Interest Deduction 

Current Law: Under the current law, individuals are only able to take up to $2,500 of student loan interest deduction on their tax return.  The amount of deduction gradually reduces as income increases and is completely eliminated for higher-income earners who have a modified adjusted gross income (MAGI) of $85,000 for individuals and $170,000 for joint filers for the year 2019. 

Proposed: Student loan interest is allowed as a deduction on the amount paid on qualified student loans.   The bill proposes to allow individuals to take a deduction without the current limitation ($2,500) or the income phase-out.

Flexibility in Retirement Accounts

Current: The current law defers income taxes on 401(k) plans.  Thus, individuals are required to make tax payments upon withdrawals – usually in retirement years when income may be lower.  

Proposed: The bill would also propose an option to current 401(k) plans. Individuals would have an option to choose to have their contributions treated as a Roth contribution.  This will allow individuals to prepay taxes now for withdrawals expected to make in retirement.

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