How 529 Plans Are Becoming Even More User-Friendly

If you have a child planning to attend college someday, starting to save early is critical. One of the most popular ways to save is through a 529 plan. These plans continue to evolve, offering more flexibility for families and even opportunities for long-term retirement savings.

529 Plan Crash Course

529 plans are designed to help pay for K-12 & post-secondary educational costs. All 50 states offer 529 plans, and their rules and regulations vary by state. There are two main types of 529 plans: education savings and prepaid tuition. For today’s purpose, we’ll be focusing on education savings plans. 

Education Savings Plans

Education savings plans are the more common of the two 529 plan options. Funds within an educational savings plan grow tax-deferred and can be withdrawn tax-free as long as they’re used for qualified education expenses. Qualified education expenses are: 

• School tuition and fees

• Books or other supplies, like computers or other software used for schoolwork

• Student loan payments

• Room & Board 

• Special needs or accessibility equipment for the student

Funds in an education savings account are invested into pre-set investment options, most typically mutual funds. The investment's performance impacts the growth of the funds within the account over time. Other advantages of an education savings plan include high contribution limits, ease of operation and continuity, tax-deferred growth, tax-free withdrawals, and tax-deductible contributions. As far as taxes are concerned, it’s a win, win, win! 

Enhanced Flexibility Through Legislative Changes

New provisions allow unused funds in a 529 education savings plan to be rolled over to a Roth IRA under certain conditions. This can help transform leftover education savings into retirement savings, giving families more flexibility for long-term financial planning.

What’s The Catch? Requirements for Rolling Over 529 Funds to a Roth IRA

• The 529 plan must be at least 15 years old

• Leftover funds must have been in the plan for at least 5 years

• The rollover is limited to $35,000 over the lifetime of the account

• The Roth IRA contribution limit applies for the year of the rollover

• The account beneficiary must have earned income in the year of the rollover

Funds can either be rolled over to a Roth IRA for the same beneficiary or used for another child’s educational costs if the original beneficiary has completed their education.

These changes give families an opportunity to maximize unused 529 funds, whether for additional education or long-term retirement savings.

If you have questions about opening a 529 plan or how these changes may impact your current plan, contact us today.