A 529 plan is a college savings plan. 529 plans are run through individual states and provide significant tax benefits. Some 529 plans are prepaid tuition plans, but the majority of 529 plans are simply savings plans.
In December, the Secure Act 2.0 provided a big update 529 Plans. For anyone who desires to save for college expenses, it’s one worth noting.
First, here are some important pieces to understand about 529 plans:
1. A person can choose any state’s plan. So, you are not stuck with your home state’s college savings options. And this is good news because other states may offer a better plan.
2. A person places after-tax dollars into the 529 plan, invest it, and then pull out the funds tax free for educational purposes.
3. Contribution limits are usually extremely high, but individuals will want to check with the state’s plan for specific limits.
4. Withdrawals must be used for qualified educational purposes. These expenses include tuition, books, room and board, computer, and internet.
5. If beneficiary decides not to go to college (or doesn’t use all of the funds), plan owners can switch beneficiaries. Beneficiaries can be any qualified family member--spouse, child (or stepchild), sibling (or step-sibling), father (or stepfather), mother (or stepmother), first cousin, niece, nephew, aunt, uncle, father-in-law, or mother-in-law.
6. Individuals can also use a 529 plan to cover K-12 educational expenses, up to $10,000 per year.
There is now an additional answer for the common 529 plan question “What if my child gets a scholarship or decides not to attend college?” Up until the Secure 2.0 Act, the answer was to either change beneficiaries or withdraw the funds and get hit with income taxes and a ten percent penalty. Now, there is another option.
In 2024, 529 owners can rollover their 529 savings to a beneficiary’s Roth IRA. This is significant. Here’s some important caveats to understand:
1. The rollover must be for the beneficiary. The funds are not for the owner’s Roth IRA.
2. The 529 Plan must have been opened for 15 years.
3. Contributions and earnings that are less than 5 years old, cannot be rolled into the Roth IRA.
4. Rollovers are still subject to the Roth IRA contribution limit.
5. There is a $35,000 lifetime transfer limit.
Further clarification of the new rule will likely be released in the future. This addition will play a role in an individual’s decision whether to use a 529 plan for their college savings. If you are a parent, guardian, or just a great person who’s looking to save money for college expenses, you now have another reason to consider a 529 plan.