The 529 – more than a college savings plan
As tuition and learning expenses increase, planning for your children’s or beneficiaries’ educational future is crucial. For many caregivers still grappling with student loan nightmares, saving up for your children’s education is a cost-effective option.
A 529 plan is a significant solution for securing your child’s education future as the state-sponsored initiative offers tax advantages for contributions into the account.
The basics
Every state offers at least one 529 plan. However, tax incentives on deposits are not mandatory, which is why they vary among states. Many states offer a tax deduction or tax credit for contributions to a 529 plan, enabling parents to lower their tax liabilities by saving for their children’s education. For most 529 plans, contributions are taxable, money in the account grows tax-free and distributions are tax-exempt when used for qualified education expenses.
Kindergarten through 12th grade private education
Recent law changes allow you to pay tuition with 529 plans for qualified kindergarten through 12th grade private schools. The spending limit per beneficiary is $10,000 per year. However, the payment only covers tuition, not other school-related expenses. Tax implications vary among states. Check your state’s tax codes to verify if K through 12 withdrawals have the same treatment as college withdrawals.
You can convert unused or unneeded benefits to a Roth IRA
The latest 529 plan development is that you can rollover up to $35,000 per beneficiary of unused or unneeded benefits into a Roth IRA account in the beneficiary’s (student’s) name. The provision offers tax relief for people who had to pay taxes or incur penalties for leftover funds in their 529 plans.
The rollover must follow Roth conversion rules. Thus, you cannot exceed the annual Roth contribution limit set at $7,000 per year for 2024. The beneficiary must also have earned income equal to or at least as much as the transferred amount. You cannot transfer the entire $35,000 at once.
The 529 plan account must be in existence for 15 years to qualify for a Roth conversion. Changing beneficiaries within the account’s period of existence may reset the clock. Additionally, you can only convert funds that have been in the 529 plan for at least five years.
Your Modified Adjusted Gross Income (MAGI) determines your eligibility and contribution amount to a Roth IRA. In 2024, single filers with less than $161,000 and married individuals filing jointly with MAGI less than $240,000 are eligible for Roth IRA contributions. Your contribution amount diminishes if your income lies within the limit.
The rule does not apply for 529 plan conversion to a Roth IRA, because income limits do not directly apply. You can take advantage of this provision if your income is too high, making you ineligible to open a Roth IRA account or make maximum contributions. In theory, if you’re a high earner, you could set aside funds in a 529 plan and convert the account to a Roth IRA in 15 years.
The 529 makes for a great multigenerational legacy plan
Account holders of 529 plans have the liberty to change beneficiaries as they see fit. Thus, if you open an account for your child, and overfund it, you can roll over the remainder of the account to your grandchild and continue to fund it even further. Your money can always be put to good use for your beneficiaries. This allows for true multigenerational educational planning with tremendous tax deferral benefits.
Consider your options
The 529 plan offesr a truly attractive way to save for your child’s education, but it certainly isn’t the only way. Sit down with a financial planner who can better understand your goals, factor in your current tax situation and model your potential future financial life to determine which tool(s) will give you the most appropriate customized approach to supporting your child’s future education.
Ben Soccodato and Chris Kampitsis head The SKG Team at Barnum Financial Group in Elmsford.