What You Need to Know about 529 Plans
May 29, 2024

Although it is never too late to start the process of saving for your child’s education, the earlier you start, the more advantageous the funding will be. Today we are going to discuss one of the most popular educational investment tools, “529 Plans”. Each state administers its own 529 plans under Federal guidelines.

Contributions into a 529 plan grow tax-free and are tax-exempt when withdrawn, as long as the distributions are utilized for a qualified educational expense. Qualified educational expenses are broad and basically include tuition, textbooks and room and board. In most states, contributions to the state 529 plans, will be tax deductible. Furthermore, contributions into the plan also qualify for the annual gift tax exclusion, which provides a helpful avenue for tax-efficient gifting. In fact, 529’s are the only asset allowing five years of annual gifting by front-loading in a single year.

A concern we hear quite often is, “What happens if my child decides not to attend school in the future?” Great question! These funds can be rolled over to another beneficiary in the same family to use for their education. Furthermore, the Secure Act 2.0 gives you the ability as of 2024, to roll these funds into a Roth IRA for that beneficiary (Specific rules apply).

Now you may be asking yourself, what are the drawbacks of investing into a 529 plan? If these funds are used for non-qualified expenses, the earnings will become taxable and be subject to a 10% penalty. 529 plans can also be taken into consideration for financial aid assessments. Generally speaking, parental ownership is the most common and most convenient, but household circumstances may dictate a different owner.

Start the educational funding process early and even at low contribution levels, such as $100/month, the compounding returns can dramatically assist with future tuition expenses.