News | Wealthy Behaviors
New Options for 529 Plans
Posted on September 26, 2023
Students have been back in class for a little over a month. While the novelty of the new school year may have already worn off, the lingering bills associated with the cost of education are still top of mind for those responsible for paying for those expenses. Whether it’s extracurricular fees, new textbooks, or upgraded technology, this time of year can be stressful for those footing the bill for educational expenses. But it’s not just the rising costs of new backpacks and sneakers. Between 2000 and 2021, the average college tuition (including fees) went up 69%.[i]
How can you pay for a quality education when the cost rises faster than inflation?
Consider opening a 529 plan. 529 plans are tax-advantaged savings plans originally designed to help individuals and families save for educational expenses. Anyone can open and fund a 529 savings plan, even if they’re not related to the beneficiary.[ii]
And while 529s were initially created for higher education expenses, recent legislative changes have expanded how they can be used – including rollovers into Roth IRAs starting in 2024.
Here are a few benefits of 529 plans:
- Tax Advantages: Contributions to 529 plans are made with after-tax dollars, and the earnings on those contributions grow tax-free. Withdrawals for qualified education expenses are also tax-free, which can provide significant tax savings over time.
- Flexible Use: 529 plans have expanded in recent years. They can now be used for a wide range of education-related expenses, including tuition, fees, books, supplies, and even certain room and board costs. In some states[iii], you can now use 529 plan funds for K-12 education expenses (up to certain limits) and for qualified expenses at vocational schools and other eligible institutions.
- High Contribution Limits: Many 529 plans have high contribution limits, allowing you to save a substantial amount over time. While contribution limits vary by state, they are typically quite generous.
- Estate Planning Benefits: Contributions to a 529 plan can be considered gifts for tax purposes. This means you can contribute a significant amount without triggering gift tax consequences, provided you adhere to the annual and lifetime gift limits.
- Professional Management: Most 529 plans offer a range of investment options managed by financial professionals, making it easier for you to choose an investment strategy that aligns with your goals and risk tolerance.
Additionally, the recently passed SECURE Act 2.0 allows rollovers from 529 college savings plans to ROTH IRAs. This means beginning in 2024, beneficiaries of 529 plans may transfer unused funds directly to a Roth IRA without penalties or recognition of taxable income.[iv] There are some limitations:
- The lifetime rollover limit is $35,000.
- The 529 account must have been open and established for at least 15 years.
- The individual must be the designated beneficiary of the 529 plan and move funds to a Roth IRA in their name.
Despite the limits, these should be viewed as welcome changes for parents and account owners. Aside from alleviating fears about over-funding 529 college savings accounts, these new rules help protect account owners if the funds can’t be used as initially intended.
As with any investment, 529 plans are subject to specific rules and regulations, which can vary between states. Your Larson advisor can help you explore your options for opening a 529 plan and evaluate how implementing a 529 plan can align with your overall financial goals.