0

I am expecting some liquidity on my NSO (Non-qualified Stock Options) and ISO ( Incentive Stock Options) with current company. I have heard of 529 for college fund. Is this something I could use to pay off my spouse's loans? How does this work and what do I need to do or tell my tax advisor?

If I can't spend towards 529, then could I spend the money I get from the liquidation towards a gift to my spouse?

Please advise on how to pursue either or both of these. (United States, California)

1
  • I'm not sure that "gift to spouse" has any meaning to the IRS, since you'e the same "tax unit" (presuming you do Married Filing Jointly). – RonJohn Nov 20 '20 at 4:38
3

529 accounts are similar to Roth IRAs, in that the contributions are after-tax. Only the investment gains are sheltered from taxes.

Thus, I see no benefit to depositing money in a 529 and then immediately withdrawing it to pay you spouse's SL debt.

https://www.fool.com/knowledge-center/penalty-for-early-withdrawal-from-529-plans.aspx

There is really no such thing as an "early" withdrawal from a 529 plan. As long as the account beneficiary has qualified education expenses, it doesn't matter if the account in question has been open for 18 years or six months.

And, since you've already paid income taxes on the money you contribute to a 529 plan, you are free to withdraw your original contributions at any time for any reason.

However, if you withdraw any investment gains from a 529 account before the account beneficiary incurs any qualifying expenses, or for non-qualified reasons, the IRS can assess a 10% early withdrawal penalty.

Having said that...

https://www.investopedia.com/articles/personal-finance/020217/can-i-pay-student-loans-my-529-plan.asp

Since the passing of the SECURE Act, 529 plan holders are able to withdraw up to $10,000 tax-free to put toward their own student loan debt, or that of their children, grandchildren, or spouses.

(That includes any investment gains.)

1
  • Some states let you deduct part of your 529 contributions from state (but not federal) income tax. – Eric Dec 20 '20 at 6:52
1

The only upside I can see of doing this is if he lets the money sit in the 529 plan it will grow tax free, some states let you deduct state taxes if you use their 529 plan, and some states give you a small amount funds in your 529 when you create it. So if there is some reason to delay paying off the loan that might be a benefit. The upside would depend on your tolerance for risk, how long you are going to keep the funds in the 529 and the interest rates on your spouse's loans.

There are some alternatives that might be beneficial for your taxes such as contributing to 401ks

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.