The Benefits and Updates to 529 Education Savings Plans Explained

Thanks to a new IRS rule, as of 2024, parents can save for their kids’ college expenses and retirement all through the 529 Savings Plan.

A 529 plan is a tax-advantaged savings account designed to help families save for education expenses. Historically, the only options for unused funds included:

1. Change the Beneficiary: You could transfer the funds to another qualifying family member without tax consequences.
2. Withdraw the Funds: Withdrawing funds for non-qualified expenses, would trigger income tax on the earnings plus a 10% penalty.
3. Save for Future Education: You could keep the funds in the account for future educational needs, such as graduate school or other qualifying educational expenses.
4. Student Loan Payments: The SECURE Act allowed up to $10,000 of funds to be used for student loan repayments.

This new rule allows up to $35,000 in unused 529 plan funds to be rolled over into a Roth IRA for the beneficiary. As long as the 529 plan has been open for at least 15 years, this kind of rollover won’t trigger any penalties ultimately offering more flexibility when opening an account.

How Much Can I Contribute to a 529 Plan?

529 plans do not have annual contribution limits, but there are some important details to consider:

• Lifetime Contribution Limits: Each state sets a maximum aggregate limit for 529 plans.
• Gift Tax Considerations: Contributions to a 529 plan are considered gifts for tax purposes. You can contribute up to $18,000 per year, or up to $36,000 if married, without triggering the federal gift tax.
• Superfunding: You can consider making a lump-sum contribution of up to five times the annual gift tax exclusion amount. $90,000 for individuals or $180,000 for married couples and spread it over five years for gift tax purposes.

Who Can Contribute?

Anyone can contribute to a 529 plan. This includes parents, grandparents, aunts, uncles, friends, and even non-family members. Contributions can be made to an account you own or to an account owned by someone else.

Additionally, grandparents can benefit from a loophole when contributing to a 529 plan with recent changes to FAFSA,

Previously, distributions from a grandparent-owned 529 plan were considered untaxed student income, which could significantly reduce the student’s financial aid eligibility.

However, starting with the 2024-2025 academic year, the simplified FAFSA no longer requires reporting of cash support or distributions from grandparent-owned 529 plans. This means that grandparents can now contribute to their grandchild’s education without negatively impacting their financial aid eligibility.

This change is often referred to as the grandparent loophole and allows for more strategic financial planning for families looking to maximize educational savings and financial aid opportunities.

How Are These Changes Impacting Savings?

According to ISS Market Intelligence, since the start of 2024, $100 million in assets from 15,000 529 plans were transferred to Roth IRA accounts.

These changes have significantly enhanced the flexibility of 529 Savings Plans. Ultimately, allowing parents to save for both their children’s education and retirement. This along with the new FAFSA rules that benefit grandparents, makes 529 plans a more versatile. Similarly, it bolsters these accounts as strategic tools for family financial planning; maximizing both educational savings and financial aid opportunities.

Need more help? Check Out Simple and Effective Strategies for Paying Off or Saving Up for A Degree.

Investment advice offered through OneDigital Investment Advisors LLC.

These materials are provided for informational and educational purposes only and do not constitute a recommendation to buy, sell, or hold any security, nor do they constitute legal, accounting, investment, or tax advice. These statements do not constitute an offer or solicitation in any jurisdiction. All included information and data are limited only to the inputs and other financial assumptions indicated.