How 529 Plans Are Becoming Even More User-Friendly in 2024 via the SECURE Act 2.0

According to US News and World Report, the average annual tuition cost for an in-state public university in 2023 is $10,423. This price rises to $22,953 for a public institution out of your resident state, or $39,723 for a private institution.If you have a child that wants to go to college someday, starting to save early has become more critical than ever. Thankfully, there are ways to save that you can work into your financial plan. The most popular is a 529 plan. And, good news, 529 plans are becoming even more user-friendly in 2024 thanks to the Secure Act 2.0. Let’s run through how Secure Act 2.0 is affecting 529 plans. 

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 Funds within an educational savings plan grow tax-deferred and can be withdrawn tax-free as long as they’re used for qualified education expenses.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 considered, it’s a win, win, win! 

What’s Changing Through The SECURE Act 2.0?

If you have any leftover funds in a 529 education savings plan at least 15 years old, those funds can now be directly rolled over to a Roth IRA. Should the account’s beneficiary remain the same, the funds can be rolled into a Roth IRA for retirement savings. Or, if you’d prefer to change the beneficiary, the funds can be used for another child’s educational costs. In other words, any funds in an older 529 plan account that weren’t used for qualifying educational expenses can be rolled over without penalty.

What’s The Catch?

A few requirements are necessary to utilize the new change and roll unused 529 plan funds into a Roth IRA.  For the 529 plan account holder:

• The beneficiary must be the same for both the 529 plan and Roth IRA

• The 529 plan must be at least 15 years old

• Leftover funds within the plan must be at least 5 years old

• There is a lifetime limit of $35,000 in funds that can be rolled over

For the 529 plan beneficiary:

• The account beneficiary must have income or another form of compensation in the year the rollover is initiated

• The account beneficiary can only roll over up to the IRA contribution limit (In 2023, the limit is $6,500 for those under 50 years old)

• The rollover will serve as a Roth IRA contribution. Meaning if you roll over up to the contribution limit, you cannot make any further contributions of your own in that year

This change benefits the beneficiaries that have finished their education and have leftover funds in a 529 education savings plan that have sat for at least 5 years unused. The Secure Act 2.0 allows those funds to be utilized and transformed into retirement savings. If you have questions about opening a 529 plan or how these changes impact your current 529 plan, please contact us today.