Questions:
- Does it save much money to do this?
- We'd need to switch the beneficiary to me, and then back again to the kid later. Are there any issues with doing this?
- If we do this, logistically, how does one actually go about withdrawing money to pay for it/reporting as such to the IRS?
1. No. Imagine $1 in the 529 and $1 on your loan.
If you leave it in the 529 for one year, it (on average) grows to $1.10 - I'm assuming you've got it invested mostly in stocks because of the growth last year. Your loan dollar costs you $1.025 - that's the 2.5% interest. Subtracting the two means you gained $0.075, or seven and a half cents.
If you take it out of the 529, then you don't get the growth of the 10 cents, and you don't have to pay the 2.5 cents interest. Since this math is just the opposite of the above, you've lost 7.5 cents.
You always want to adjust for risk and taxes. There is risk that the 529 may not grow by 10% in any given year; it could even shrink. The 2.5% is a guaranteed cost. So the degree to which that risk concerns you or you think will happen, that leans towards paying off the loan. Risk assessment is fairly personal, but it can be informed by education about the investments you're in and the history of those investments, and the underlying structure of why those investments might grow or shrink based on economic factors.
Taxes-wise, your 10% growth is tax deferred while in the 529 and tax free if withdrawn for qualified education expenses, which is very likely in your case, since you haven't yet overfunded the account and your partner is pregnant (congrats!). That factor leans towards considering the 10% to be stronger than average because the taxes you're not paying over the years is equivalent to additional wealth for you. The 2.5% might be tax deductible, depending on your income level, so that would make it a little lower on an adjusted basis. So all this means that the difference is effectively more than 7.5 cents per dollar.
Since each dollar you take out via the SECURE Act option costs you 7.5 cents per dollar per year, most people wouldn't want to compound the pain by doing it with 10,000 of them.
2. In my state quite easy - you just fill out a few forms. In my sister's state, they won't let you establish a 529 for an individual over 18, so she couldn't do what you describe. Call your 529 customer support and ask them. Alternatively, you can open an empty account for you and then transfer funds back and forth from your kid1's account into your account. It accomplishes effectively the same thing.
3. To make a 529 withdrawal, you just contact your 529 customer support and say, I want to make a withdrawal. It's not any harder than making a withdrawal from a bank savings account. I actually can log onto my kids' 529 accounts and ACH the money into my checking or savings account via an online request. Withdrawals made for qualified educational expenses are not reported on your tax return. You and the IRS will receive a 529 from the 529 custodian each January reporting the amounts withdrawn over the previous year, and you should be prepared to prove that those amounts were spent on qualified educational expenses. If they were not, then, well, it's reportable on your tax return (I *think* it's line 21 other income, but I'm not 100% certain and don't feel like looking it up right now - you could dig into Pub 970 if you're curious.)
Your 529 customer support might ask you if the withdrawal is qualified. Since the SECURE Act is new, they may not have their systems set up to handle withdrawals that are qualified due to paying down student loans.