National 529 Day is coming up and its a great reminder of the importance of saving for college. According to The College Board, in 2024, the average tuition and fees at a private, non-profit four-year university will have risen to $41,540, with many leading schools charging in excess of $60,000 per year.
Given rising tuition costs, it’s vital to plan ahead for these expenses, while taking full advantage of available tax benefits. That’s where 529 plans may help.
What is a 529 Plan?
A 529 plan is a tax-advantaged account designated for future educational expenses, allowing contributions to grow tax-deferred for a future withdrawal date. Withdrawals may also be tax-free if used for qualified education expenses.
There are two primary types of 529 plans:
- 1. Pre-Paid Tuition Plan: The 529 Pre-Paid Plan is FAR LESS POPULAR because of the limitations on where pre-paid tuition can be used. For example, if you contribute towards a California pre-paid tuition plan, you may not be able to use those pre-paid credits for colleges outside of California.
- 2. Savings Plan: The 529 Savings Plan may be used in any state where the education expense occurs. This is a tax-advantaged account (not credits) that is designated for educational expenses.
Advantages & Disadvantages of a 529 Plan
- Contributions can grow tax-deferred, and withdrawals made to pay for qualified education expenses are tax-free.
- Some states allow for state income tax deductions with the amount contributed.
- You may front-load your contributions to allow more time to compound your contribution and for estate planning purposes.
- Front-loading may also be used for estate planning which allows for up to 5 years of gifting into the 529 plan.
- Beneficiaries can be changed, allowing you to utilize unused funds for other qualified family members.
- Contributions may be used for K-12 education.
- One disadvantage is that earnings that are withdrawn from a 529 Plan and not used for qualified education expenses may be subject to penalty and will be taxed as income.
The New 529-to-Roth IRA Transfer Rule
The SECURE 2.0 Act of 2022 allows distributions from 529 plans to Roth IRAs in case your child decides not to attend college or doesn’t use all the funds from their 529 plan for education expenses.
- The 529 plan must be open for at least 15 years.
- The lifetime limit for the rollover is $35,000 per beneficiary.
- The Roth IRA must be in the name of the beneficiary of the 529 plan.
- Any contributions made within the past five years (and earnings on those contributions) are ineligible to be moved into the Roth IRA.
- The annual limit on the rollover is the IRA contribution limit for the year, less any other IRA contributions. For example, the current IRA contribution limit is $6,500. If the beneficiary made any IRA contributions, the rollover amount must be reduced by those contributions. Therefore, if the beneficiary contributed $2,000 to any IRA, the amount available for rollover is $4,500. Consequently, getting to the $35,000 lifetime limit may take more than five years.
- The rollover must be a plan-to-plan or trustee-to-trustee rollover. This means you cannot take a check from the 529 plan to deposit into the IRA.
- The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary’s income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
- The beneficiary must have earned income, and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit.
Tax Planning Considerations
How about opening a 529 account for a newborn? The new 529-to-Roth rollover provision helps address the risk of having leftover funds in the 529.
529 Plans as an Estate Planning Tool
Estate planning isn’t just about passing on wealth—it’s also about shaping a legacy. A 529 plan can be a powerful tool, allowing families to fund future education while reducing the taxable value of their estate. Contributions to 529 plans qualify for the annual gift tax exclusion, and in some cases, individuals can front-load five years’ worth of gifts at once. This strategy supports loved ones’ educational goals while offering potential tax advantages.
Have Questions about Planning for Education Expenses?
As with all forms of investment, time is your friend. The sooner you create and potentially front-load a 529 plan, the sooner you can start compounding your capital, helping to cover the considerable cost of education down the road, all while using a tax-advantaged structure.
Reach out to a Churchill advisor at (877) 937-7110 or
[email protected] to discuss how we can work alongside you to make saving for college and/or K-12 education part of your overall financial plan.
SVP, Director of Financial Planning: Scott Perkins, MS Tax, MBA, CFP®
Sources: The College Board, “Trends In College Pricing.”
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