With costs at some colleges approaching $100,000 per year, families need a savings strategy they can count on.
Financial experts and plan investors agree that 529 college savings plans are a smart choice for many. And, starting in 2024, there are even more benefits, including higher contribution limits and the ability to roll unused money into a Roth individual retirement account without a tax penalty.
“There are three pretty big changes this year,” said Vivian Tsai, senior director of college savings at TIAA and president emeritus of the College Savings Foundation, a nonprofit organization that supports 529 plans in public policies.
Whether the funds are for college or career, she said, “529 plans are better than they’ve ever been before and they’re more flexible.”
Here’s a look at everything you need to know.
Benefits of a 529 College Savings Plan
1. Tax deductions or credits for contributions
Even before the recent changes, a 529 plan already had many benefits. In more than half of U.S. states, you can receive a tax deduction or contribution credit. Earnings grow on a tax-advantaged basis, and when you withdraw the money, it is tax-free if the funds are used for qualified education expenses.
A few states also offer additional benefits, such as scholarships or matching grants, to their residents if they invest in their home state’s 529 plan.
2. New Roth IRA rollover rules
Starting in 2024, families can transfer unused 529 plan funds to the account beneficiary’s Roth IRA, without triggering income taxes or penalties, as long as the 529 plan has been open for at least 15 years.
This change follows the Secure Act of 2019, which allowed 529 users to put a portion of funds toward their student loans: up to $10,000 for each beneficiary of the plan, plus an additional $10,000 for each of the siblings and sisters of the beneficiary.
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Previously, tax-advantaged withdrawals were limited to qualified education expenses, such as tuition, fees, books, room and board. Restrictions have eased in recent years to include continuing education courses, apprenticeship programs and student loan repayment. But now 529s offer much more flexibility, even for those who never go to college, Chris Lynch, president of tuition finance at TIAA, told CNBC recently.
“One point of resistance that potential participants have encountered is the limitation regarding what happens if my child gets a scholarship or decides not to go to college,” Lynch said.
In the latter case, you could transfer the funds to another beneficiary or withdraw them and pay taxes and a penalty on the winnings. If your student receives a scholarship, you can generally withdraw up to the scholarship amount without penalty.
However, the added benefit of being able to convert any remaining funds to a Roth IRA tax-free after 15 years, up to a limit of $35,000, “helps eliminate that resistance point,” he said. he declares.
3. Higher contribution limits
The amount you can contribute to a 529 plan is higher in 2024. This year, parents can donate up to $18,000, or up to $36,000 if you’re married and filing your taxes jointly, per child without these contributions being taken into account in your lifetime gift tax exemption. , compared to $17,000 in 2023.
Wealthy families who want to help finance a family member’s higher education might also consider “superfunding” 529 accounts, which allows five years of tax-free gifts to be frontloaded into a 529 plan.
In this case, you could contribute up to $90,000 in a single year, or $180,000 for a married couple. But then you wouldn’t be able to give more money to that same recipient over a five-year period without it counting toward your lifetime gift tax exemption.
“If you can afford it, it’s a big deal,” Tsai said.
According to Fidelity, a larger initial lump sum contribution can potentially generate more revenue than a contribution of the same size spread out over a few years because it has a longer time horizon.
4. The new “loophole” for grandparents
A new, streamlined free application for federal student aid rolled out late last year, with additional benefits for grandparents who have 529 accounts for their grandchildren.
Under the old FAFSA rules, assets held in 529 college savings plans owned by grandparents were not reported on the FAFSA form, but distributions from these accounts were considered untaxed student income, which which could reduce assistance by up to half of this income.
As part of the FAFSA simplification, students no longer have to answer questions about a grandparent’s contributions, creating a “loophole” for grandparents to fund a little one’s college funds -child without affecting their eligibility for financial aid.
“In 2024, the grandparent penalty will disappear, so 529 plans are proving, once again, to be a truly exceptional way to save,” Tsai said.
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