Why a 529 Plan Is Even Better in 2024

We have four lovely kids, the oldest of which is becoming a teenager this year.

When each of them was born, we opened a 529 plan and have been making regular contributions.

Our hope is that they each get into their college of choice and, with a mixture of financial aid and parental aid, they graduate with just a little bit of student loan debt.

When we started thirteen years ago, it was a little bit of a gamble. What if our kid doesn’t go to college? What happens to the money?

Thirteen years ago, the only option you had was to change beneficiaries on the 529 plan. If our oldest didn’t need it, we could change it to our 2nd. With four little ones, the changes of at least one of them going is pretty high… I think? 😂

(ok ok, there are other alternatives too… like what if they got massive scholarships and didn’t need the money? 😂)

But with the Secure 2.0 Act, we no longer have to rely on hope. It offered up a lot of changes to 529 plans that are beneficial to savers.

529 Plans Were Great To Begin With!

The appeal of a 529 plan is that you can contribute after tax dollars that grow tax free. You can withdraw from a 529 without paying any additional taxes if you use the for qualified educational expenses.

The list of qualified educational expenses is quite large and as long as the beneficiary is continuing his or her education, chances are the costs will qualify. They’re all listed in Publication 970 – Tax Benefits for Education under the Qualified Tuition Program section.

If your named beneficiary doesn’t use it all up, you can always name a new one! (including yourself!)

That’s why, with four kids and the cost of higher education, I’m confident the money we’ve put into the 529 will get used up (we also put in a modest amount, because we get practically no tax deduction in Maryland for it).

Before 2024, one big downside of the 529 plan is if your kids don’t go to college. What happens if you save a lot of money into an account and there’s no one who needs to use it? In the past, you might take some continuing education classes but that pales in comparison to college costs. With the new changes, which we detail below, this is less of a problem.

Now – the only downside is that 529 assets are used in the calculation for Expected Family Contribution, which is used to calculate financial aid. Fortunately, it’s only $564 for every $10,000 in the 529 account but chances are your returns will be much higher than that.

Now You Can Rollover to a Roth IRA!

This is the best change – you can now rollover some of your funds from a 529 plan to a Roth IRA plan.

A few ground rules and conditions:

  1. The 529 plan has to have been opened for at least 15 years
  2. The funds being rolled over have to have been in the 529 plan for at least 5 years (cannot exceed the balance as of five years ago)
  3. Beneficiaries can roll over $35,000 over their lifetime into a Roth IRA
  4. They are still limited by the annual contribution limit of a Roth IRA ($7,000 in 2024), but no income limitations
  5. The beneficiary must have earned income of at least the amount being rolled over in that year

In other words, you’re able to use a 529 as a source of cash for funding the beneficiary’s Roth IRA. This is especially beneficial if the beneficiary earns too much income to contribute to a Roth IRA.

In looking what this looks like for our oldest, the plan will have been open for close to 20 years when we reach the point where we’d decide what to do with it.

There are some potential gotchas – since this is a relatively new rule and we aren’t sure how some states will interpret them. Not every state will follow what the federal government considers qualified educational expenses. So, you may have to pay state taxes if your state hasn’t recognized rollovers as a qualified expense (or you need to wait until they do).

For example, New York explicitly states that “K-12 tuition, rollovers to a beneficiary’s Roth IRA account, and qualified education loan repayments are considered nonqualified withdrawals and will require the recapture of any New York State tax benefits that have accrued on contributions.” ☹️

My home state of Maryland does recognize the federal list, as explained in this FAQ, so I’d feel comfortable doing it when the time comes.

More Qualified Education Expenses!

Not all of these were expanded by the Secure 2.0 Act but I include them here because they’re relatively new changes and, well, I wanted to know them.

What used to qualify as an education expenses constantly continues to expand and now it includes things such as student loans and more. The original SECURE Act of 2019 let you pay for student loans up to $10,000 (lifetime limit) from a 529 plan.

What was a big change in 2017, with the Tax Cuts and Jobs Act, was that you can now use them to pay for K-12 education – including private, public, or religious elementary, middle, and high school tuition. There is a $10,000 per year limit.

Again, must like the rollover of funds to a Roth IRA, you need to check with your state to see what they include as qualified education expenses and if it matches the federal list.

OK, Some Unknowns…

There are a few unknowns because the law is so new and subject to interpretation.

What happens if you change the beneficiary on the 529 account?

Does that restart the 15 year clock or is it really tied to the opening of the account?

What if you roll your account over from one state to another state’s plan, does that restart the 15 year clock? Or does the original plan’s open date count?

As for the $35,000 limit, is that for a single 529 plan to a beneficiary or each 529 plan?

While we can agree on the spirit of the law, how it’s interpreted and used is a whole different matter.

Even with these unknowns, I’m now even more comfortable with our approach to 529 plans and continue to make contributions to each of our kids’ plans.

Other Posts You May Enjoy:

Visible Review: Affordable Unlimited Data Plans

Visible Wireless is a Verizon-owned prepaid cell phone company offering affordable unlimited data plans and no contracts. Users also benefit from access to the Verizon network. Is Visible worth switching to? We break down its plans, key features, and pros and cons. Learn more.

BMO Alto Review: Great Rates with Low Fees

BMO Alto is the online-only banking arm of BMO Bank. It offers a high interest savings account and several CD terms, with no monthly fees or minimum balance requirements. But how does it compare to other online offerings, such as those offered by Raisin, Barclays, and Discover Bank? Find out in this BMO Alto review.

Our Phone Plan Strategy for Four Kids

With four kids, our family will have to be smart about how we approach our cell phone plans and usage. With so many options, I explain our (tentative) strategy for cell phones for our family of six.

About Jim Wang

Jim Wang is a forty-something father of four who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools, everything I use) is Empower Personal Dashboard, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

>> Read more articles by Jim

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

Subscribe
Notify of
guest

7 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Phill
22 days ago

Great read. Thank you for this.

linda
21 days ago

What is the difference between 1. and 2.? If you open acct there would be funded right? 5 years of 15 years? thanks

James Rowe
20 days ago

Always a great read. Articulate, sincere, and informative. Thanks.

Stewart
20 days ago

Beneficiaries can roll over $35,000 over their lifetime into a Roth IRA They are still limited by the annual contribution limit of a Roth IRA ($7,000 in 2024), but no income limitations In other words, you’re able to use a 529 as a source of cash for funding the beneficiary’s Roth IRA. This is especially beneficial if the beneficiary earns too much income to contribute to a Roth IRA. I think what you are trying to tell us is that there is still an income limitation to contributing to a Roth but that does not apply to 529 Plan rollovers to a… Read more »

As Seen In:

7
0
Would love your thoughts, please comment.x
()
x