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 Funds within an educational savings plan grow tax-deferred and can be withdrawn tax-free as long as they’re used for qualified education expenses.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.
This commentary reflects the personal opinions, viewpoints, and analyses of The Dala Group, LLC employees providing such comments. It should not be regarded as a description of advisory services provided by The Dala Group, LLC or performance returns of any The Dala Group, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The Dala Group, LLC manages its clients’ accounts using various investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
