7 Things You May Not Know About 529 Plans

529 Plans exist to help families save and pay for education. But changes to the law have broadened its uses. Here are 7 things you may not know about 529 plans.

One of the best ways to save for college for your children or grandchildren is through a 529 college savings plan. 529 Plans have been around since 1996 when Congress created Section 529 of the Internal Revenue Code to incentivize families to save for education. They established federal tax benefits for these plans to make them attractive.

While still primarily used to save and pay for college education, changes have been made over the years to broaden its uses.

Here are seven things you may not know about 529 college savings plans:

  1. 529 plans can be used to pay for apprenticeships, vocational training, and other post-secondary education programs.
  2. Up to $10,000 per year can be withdrawn tax-free from 529 plans to pay for pre-K through 12th grade. This amount is per beneficiary per year. It is important to note that this is a federal benefit. Not all states adhere to this provision.
  3. 529 plans are not just for your children. You can open a 529 plan for anyone, regardless of their age. This means that you can use a 529 plan to save for your own education, or you can use it to save for the education of your grandchildren, nieces, nephews, or other loved ones.
  4. Up to $10,000 can be withdrawn from a 529 plan to pay for the beneficiary’s student loan debt. This limit is a lifetime limit, and not all states conform to this provision.
  5. 529 plans offer a new option to roll over funds into a Roth IRA for the beneficiary, beginning in 2024. Currently, a lifetime limit of $35,000 can be rolled over to a Roth IRA. The rollover is subject to the annual Roth IRA contribution limits, and the 529 accounts must have been opened for more than 15 years.
  6. 529 plans are portable. If you move to a different state, you can keep your 529 plan and continue to use it to save for college. You can also transfer the beneficiary of one plan to another person tax-free if the transfer is amongst qualified family members. Qualified family members include spouses, children, in-laws, aunts, uncles, nieces, nephews, and first cousins.

Distributions can be taken from the 529 plan to pay for non-qualified expenses such as a car or vacation. However, the tax consequences are not ideal as the earnings portion of the distribution is subject to Federal and State income tax and a 10% Federal withdrawal penalty. While not advisable for certain expenses, it is important to understand the money is not restricted from withdrawal.

Understanding the above can help you maximize the benefits that your 529 plan offers. Congress will likely continue to update these plans to allow more flexibility. Don’t hesitate to contact us if you have any questions about your 529 plan or how the state you (or your beneficiary) live in views the tax ramifications. We are happy to assist you.

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