529 Plans: Guide to College Savings

In the financial world, we like to recognize the month of May for 529 plans (5/29 – get it?). Also known as qualified tuition programs, 529 plans are tax-advantaged education savings accounts that can help finance a child’s education track from kindergarten through graduate school. Please allow me to highlight five key takeaways about 529 plans.

Types of 529 Plans

Prepaid tuition plans let you pre-pay current tuition rates for future attendance at selected public colleges and universities. Prepaid tuition plans have certain stipulations, such as restricting payment for room and board or elementary/secondary education. While these plans are not guaranteed by the federal government, most are sponsored by states. With the rising cost of tuition, prepaid tuition plans allow you to lock in potentially lower prices for college later on, however you can run the risk of not receiving all your money back if a beneficiary does not attend a participating college or university.

Education savings plans offer tax-deferred growth and tax-free withdrawals for qualified education expenses like tuition, room and board, books, computers and student loan payments. All plans are sponsored by state governments and are generally accepted at colleges or universities within, and some outside, the United States. Education savings plans have pre-set investment options as well, allowing the account holder to change investment options twice per year or when a beneficiary is changed.

Tax Benefits of 529 Plans

Contributing to one of these plans could offer investors special tax advantages depending on the plan and state of residence. The money in a 529 plan grows tax-deferred until it’s withdrawn, and as long as the money is used for qualified education expenses, withdrawals are exempt from state and federal taxes.

Those 70 and older may deduct the entire amount contributed to a Virginia 529 account in one year. You can participate in almost any 529 plan across the country, no matter what state you live in. Nevertheless, you should look at your home state’s plan first because it may offer a state income tax deduction, credit for contribution, matching grants, and a variety of other state-specific benefits including fee-waivers or lower fees.

Ownership

A key feature of 529 plans is ownership. They remain in the estate of the owner or parent (depending on if a successor is named). This means ownership never transfers to the beneficiary of the account. Also, if the beneficiary does not need any/all funds for college, the funds are transferable to another qualifying relative without penalty at any time.

When deciding on a plan you will also want to consider the following:

• • Associated fees (i.e., opening fees, annual fees, servicing fees),
  • Available investment options, and 
  • Service reputation of the plan (the ease in getting a hold of someone should you need to make changes).

Gifting

Often gifts consist of toys or clothes that pile up, but what about a gift for the future? Consider forgoing gifts for holidays and birthdays and encouraging contributions toward their education! Anyone can give to an existing Virginia 529 account (if they have the account owner’s gift I.D.) and there are several ways to do this. 

SECURE 2.0 Act Updates

SECURE 2.0 Act addressed concerns over potentially lost money tied up in 529 plans. Should you no longer need 529 assets for educational expenses, you may now transfer funds into a Roth IRA for the benefit of the beneficiary. This is a way to piggyback retirement savings onto your college savings.

However, with this option comes rules:

• • A maximum limit of $35,000 to be rolled into a Roth IRA over a lifetime;
  • Must have owned the 529 plan for at least 15 years before a rollover can take place and any contributions made in the last 5 years before distributions began are not eligible to convert;
  • The annual Roth contribution limit has to be abided by ($7,000, or $8,000 if you’re 50+ in 2024); and
  • The beneficiary of the 529 plan must also be the account owner of the Roth IRA and have earned income equal to or greater than the amount they plan on transferring.

While there are quite a few caveats, the Roth IRA rollover is a great option we didn’t have previously. If this option applies to you, here is how to get started:

• • Ensure your state allows 529 plan conversions to Roth IRAs.
  • Request paperwork from your 529 plan custodian.
  • Be prepared to pay taxes on the earnings from the conversion as they are considered taxable.

Ultimately, 529 plans allow tax-deferred earnings that grow over time; the longer it’s invested, the greater the opportunity for growth. If you have any questions, please consider consulting a trusted financial advisor. At Tull Financial Group, our team of advisors are educated and highly experienced in guiding you through 529 plans and college saving options for your children, grandchildren, relatives, and friends.