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The 529 college savings plan is just a few years shy of its 30th birthday and arguably represents one of the best education-related bipartisan achievements of the past three decades.
Simply put, 529s have become favored vehicles of families looking to save for kids’ education on a tax-free basis. Capital can be allocated to investment accounts, allowing the cash to compound and grow over the long-term and as long as it’s withdrawn for educational purposes, taxes are a moot point.
Contributions to 529’s are tax deductible, but the perks don’t end there. Equity income and bond interest payments earned within these plans aren’t taxable nor withdrawals, provided the capital is being allocated toward education expenses. In other words, advisors should tell clients the money they direct to a 529 can’t one day be used for a boat or a vacation home unless they want to deal with the tax consequences.
All of that sounds good and it is, but some clients have been reluctant to embrace 529 plans because excess savings could not be moved into retirement accounts, such as Roth IRAs. Good news: That will change with the arrival of the new year.
A Big Deal for 529 Adoption
The Secure Act 2.0 contains the good news regarding 529 plans. Namely, when the calendar turns to 2024, clients can shift excess funds in 529 plans to retirement accounts.
The SECURE Act 2.0 also has some provisions for folks that saved for their kids’ college educations via 529 plans and now have some leftover capital in those accounts.
Under the new guidelines, clients can convert that excess into an IRA as long as the IRA is in the name of the 529 beneficiary and as long as the 529 plan is at least 15 years old. The maximum amount that can be converted to a Roth IRA from a 529 account is $35,000 over the life of the recipient. Indeed, this shift could stoke fresh 529 adoption because the inability to move leftover cash from 529s to more compelling investments has long been a hurdle to broader acceptance. Data confirm as much,
“Yet, total investments in 529 plans fell to $411 billion in 2022, down nearly 15% from $480 billion the year before, according to data from College Savings Plans Network, a network of state-administered college savings programs,” according to CNBC.
Other 529 Points of Emphasis
The ability to roll unused 529 cash into retirement accounts is a new benefit and noteworthy one at that. However, there remain some often unsung perks of 529s that are worth highlighting to clients.
For example, advisors can help grandparents encompass 529s into broader estate planning efforts. Plus, 529s aren’t just for college and they can be used to repay student debt – something to consider with college escalating at a rapid rate. Additionally, there are no limits as to whom can contribute to 529s.
“While parents are the most likely to contribute to a child’s 529 plan, other family members can legally contribute to the plan, too. That includes close relatives such as grandparents, aunts and uncles as well as those less closely related. In fact, anyone can contribute to a 529 plan and name the child as a beneficiary, either through your own plan or that owned by someone else,” according to Bankrate.