Until now, 529 savings plans were widely considered the best way to save for college. But there has always been a major sticking point, according to financial experts and plan investors.
The funds were to be used for qualified education expenses such as tuition, fees, books, room and board. Although restrictions have eased in recent years to include continuing education courses, apprenticeship programs and even student loan repayment, any limitation on these future savings created “a mental barrier”, said Vivian Tsai, president of the College Savings Foundation.
These projects are gradually gaining momentum for several reasons.
In some states, you may receive a tax deduction or contribution credit. 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.
And yet total investments in 529 plans fell to $411 billion in 2022, a nearly 15% drop from $480 billion the year before, according to data from the College Savings Plans Network, a network of state-administered college savings programs.
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“Last year we saw a pretty noticeable reduction in contribution behaviors,” said Chris Lynch, president of tuition finance at TIAA. Regular contributions to a 529 college savings plan have taken a backseat in favor of paying more urgent bills or everyday expenses, he said.
Additionally, many prospective students have begun to completely rethink their plans. Some opt out completely or consider enrolling in a local, less expensive public school or community college.
Now, 529s offer more flexibility, even to those who never enroll in college, Lynch said.
“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 such cases, you could transfer the funds to another beneficiary, or withdraw them and pay taxes and a penalty on the winnings. If your student wins 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.
“It’s becoming a no-brainer at this point,” said Marshall Nelson, a wealth advisor at Crewe Advisors in Salt Lake City.
Of course, there are still certain limits: the 529 account must have been open for 15 years and account holders cannot renew contributions made over the last five years. Rollovers are subject to the annual Roth IRA contribution limit, and there is a $35,000 lifetime cap on 529 transfers to Roth.
Still, “we’re going to see a spike in 529 usage,” Nelson predicted.
Even if someone in their 20s put $35,000 in a Roth IRA and left it alone, it could be nearly $1 million in 40 years, he said.
“It’s something I see growing,” Nelson added. “Now they have the opportunity to use that money to supplement their retirement; it’s a huge win.”
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