2024 Guide to 529 Plans

May 28, 2024

10 Interesting Facts about 529 Plans

The fundamental appeal of a 529 plan lies in its unique tax treatment. Any earnings accumulated within the plan grow tax-deferred, meaning you’re not charged annually on the money as it compounds. More significantly, withdrawals are tax-free when they are used for qualified educational expenses, such as tuition, books, and certain room-and-board costs. This makes the 529 a powerful vehicle for those who prioritize education savings.

But here’s a lesser-known fact about 529 plans – their coverage was expanded under the SECURE Act, allowing funds to be used for a broader spectrum of experience. For instance, you can now utilize up to $10,000 annually to pay for K-12 education, including for public, private, or religious institutions. Furthermore, 529 plans provide a vehicle to repay student loan debts – an expense that has become a significant financial burden for many households.

The connection between 529 plans and the estate can be skillfully used for tax optimization. Anyone can contribute to a designated beneficiary’s 529 plan, and these contributions can qualify for the annual gift-tax exclusion. Maximizing this strategy can significantly reduce your taxable estate, particularly when contributions are made early, and the plan can grow over several years. This makes it an effective estate-tax planning tool.

An advanced technique, called “Superfunding,” allows contributions up to five times the annual exclusion with the tax implications spread out over five years. Superfunding can be particularly strategic for grandparents aiming to skip a generation for estate tax purposes.

One misconception about 529 plans is their inflexibility—usually set for the education of one beneficiary. However, the IRS’s definition of family is broader than you might think. It can include siblings and even certain in-laws. If the original beneficiary doesn’t require the funds for education, they can be redirected without loss of tax benefits.

Another underutilized facet of 529 plans is their ability to be rolled into an Achieving a Better Life Experience (ABLE) account. An ABLE account is designed to provide a tax-advantaged method to save for disability-related expenses; this presents a strategic tool for individuals who develop or have special needs for extended financial support.

In instances where a change in beneficiary or ABLE conversion is not viable, contributions to a 529 can always be withdrawn, albeit with tax consequences. The withdrawn amount will be subject to income tax and a 10% penalty, yet this flexibility ensures that the funds are not irreversibly locked into a single use. With prudent planning, the exemptions, such as scholarships or a beneficiary’s disability or death, can make 529 plans a low-risk high-reward channel for education funding.

Beginning in 2024, a new part of the SECURE 2.0 Act lets people move money from a 529 college savings account to a Roth IRA without paying taxes or penalties, as long as they haven’t used all the money in the 529. They can move up to $35,000 over their lifetime. Here are some things to keep in mind:

  • The 529 account has to be at least 15 years old before you can move the money to a Roth IRA.
  • You can only move up to $35,000 per person from a 529 to a Roth IRA.
  • The Roth IRA has to be in the same person’s name as the 529 account.
  • There are limits on how much you can move each year. In 2023, you could only contribute $6,500 to an IRA, including a Roth IRA, but in 2024, that limit goes up to $7,000.
  • The person getting the money in the Roth IRA needs to have earned income, just like for any IRA contribution.
  • There’s no need to worry about income limits for making Roth contributions, but if you make too much money, you can’t contribute to a Roth IRA directly. For example, in 2024, if you’re single and make over $146,000, or if you’re married and make over $230,000, you can’t directly contribute to a Roth IRA.
  • Any money you put into the 529 in the last five years can’t be moved to a Roth IRA.

It’s important to assess how a 529 plan factors in to a comprehensive wealth management approach. By incorporating this tax-advantaged vehicle, you are not only securing a pathway to educational success but also using a strategy with the potential for far-reaching financial implications.

Understanding 529 plans empowers you to make informed decisions, and working with a financial advisor is the first step in harnessing the benefits and ensures that it fits seamlessly into your financial roadmap. Find out how NPF Advisors can help.

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