New rules for 529 college savings plans have gone into effect for 2024. While funding a 529 plan has long been a great way for families to contribute to save for college in a tax-advantaged way, recent rule changes have expanded the benefits and made 529 plans even more attractive.
One concern that has loomed over 529 plans in the past is that if the funds are withdrawn for non-qualified expenses, the earnings are subject to a penalty and income tax. Students and account beneficiaries of 529 plans now have a better option for withdrawing funds they won’t need for college expenses. You can now transfer unused funds to a Roth IRA account in the account beneficiary’s name.
New 529 Rules for 2024
Funding higher education can be burdensome, but a few new rules in 2024 will make it easier for students and student loan holders.
529-to-Roth IRA Rollover
One of the hesitations as to why parents and others may not have contributed to a 529 plan in the past is that there were limitations on how those funds could be used. Funds could only be withdrawn for qualified expenses related to education. And any non-qualified withdrawals were subject to normal income tax plus a 10% federal tax penalty.
But what if your child decided not to go to college, or they received scholarships or other financial aid and didn’t require all the funds in your 529 account?
The recent rule change has had a big impact. It allows 529 plan beneficiaries to transfer unused funds without a penalty or paying taxes.
Secure 2.0 Act
Under the Secure 2.0 Act, the IRS tax code allows tax and penalty-free 529-to-Roth IRA rollovers starting in 2024, provided certain conditions are met. The conditions include:
- Beneficiaries are allowed to roll over up to $35,000 over their lifetime into a Roth IRA in their name (not the original 529 account holder’s name).
- This limit is subject to the annual Roth IRA contribution limit, which is $7,000 in 2024.
- The 529 account must have been open for more than 15 years.
- Funds cannot be rolled into a Roth IRA until 5 years after the funds were contributed or earned.
This change will give families and students more options to avoid penalties and retain their savings. It will also allow families to save for education expenses and retirement at the same time. However, there is still more to understand about this added flexibility.
The states administer 529 plans, and each state has its own process. Therefore, working with an informed tax professional in your state is important before rolling over any funds.
Understanding the Roth IRA
Understanding a Roth IRA before rolling over any “left-over” funds is also critical. A Roth IRA is a retirement savings plan. These savings accounts have rules and regulations about when someone can withdraw money with or without penalty.
So, you may be able to transfer funds from a college savings account to a retirement savings account, but those funds are still earmarked for the future and are not available for use now without penalty.
The SECURE 2.0 Act rule going into effect this year provides added flexibility on 529 plan funding; however, it is still imperative that you assess your individual situation to determine what is best for you and your family while planning for the future—both educational and retirement.
Gift Tax Increase
In 2024, the gift tax limit has been raised from $17,000 in 2023 to $18,000. The gift tax is a federal tax imposed on transfers of money or property to other individuals when the giver receives nothing or less than full value in return.
The Annual Gift Tax Exclusion is a set dollar amount you can give someone without needing to report it to the IRS. For 2024, the annual gift tax exclusion is $18,000. You must file a gift tax return if your gift exceeds this limit.
Because contributions to a 529 plan are considered gifts, individuals can contribute up to $18,000 per year to a beneficiary’s 529 account without filing a gift tax return. Married couples filing jointly can contribute up to $36,000.
Note that filing a gift tax return does not mean you must pay gift taxes. In fact, only a small number of people actually do, thanks to the lifetime exemption.
In addition to gifting tax-free money to family members for education expenses, there is an option for grandparents and others to help pay for children’s education directly with the Tuition Gift Tax Exclusion.
This rule excludes payments made directly to the educational institution for tuition from the gift tax. Helping pay for tuition in this way can significantly reduce children’s educational burden and adjust the grandparents’ taxable estate.
However, as with all gifts and educational expenses, you need to consider your situation as a whole. This may be a great option for you to pay for college, but a 529 education savings plan may be a better long-term solution.
Other Recent 529 Plan Updates
Tax and regulation changes and interpretations are consistently updated for improved understanding and implementation. 529 plan updates are no exception, so here are some of the more recent updates that impact 529 plan holders and those thinking about opening a 529 savings plan.
Qualified education expenses include those that you can pay for out of a 529 savings account. These are primarily educational expenses, but that definition has been broadened over the years.
Student Loan Repayments
The SECURE Act of 2019 allows beneficiaries of 529 savings plans to pay for student loans up to $10,000 over their lifetime. Since 529 plan funds don’t expire, distributions can be used to pay for student loan repayments for beneficiaries or their siblings.
Apprenticeship Programs Funding
Qualified apprenticeship programs and their associated expenses are considered educational expenses and can be paid for with 529 plan distributions.
529 Plans Can Be Used For K-12 Education
In 2017, a tax reform package expanded the benefits of 529 plan qualified expenses, including private school expenses for K-12 education programs. These qualified expenses are limited to $10,000, but they can be used to help pay for elementary, middle, and high school programs.
Transferring 529 Plan Funds to an ABLE Account
The same 2017 reforms allow funds transfers from a 529 plan to a qualified 529 ABLE Account, created by the 2014 Achieving a Better Life Experience (ABLE) Act. Americans with disabilities can save money for college and other expenses in a tax-deferred ABLE account to supplement private insurance and public benefits.
State-Level 529 Plan Changes
Each state manages its own 529 plan limits and potential tax deductions. Check out our state-level details page to stay updated on your state’s regulations, requirements, and taxes. You can also assess your state funds fees with our recent 529 fee study to learn more about fees and cost options for your state.
Maximize the Benefits of New 529 Rules and Roth IRA Rollover
So, how should you and your family take advantage of these recent changes? Here are some ways to benefit from the plan updates in 2024. Work with a plan advisor, financial advisor, or tax professional in your state to maximize your financial and state tax benefits.
- Enroll in a 529 plan.
- Gift up to $18,000 annually to your child or grandchild, or more if you take advantage of superfunding.
- Pay directly to your grandchild’s institution tax-free and lower your taxable estate.
- Pay down student loans with your 529 plan funds.
- Use 529 plan funds for your child’s K-12 education or apprenticeship.
- Transfer unused 529 funds to a Roth IRA retirement plan.
New Benefit: Student Loan Payment Retirement Account Matching
If you’ve completed college and are still paying down your student loans, you have a new option for retirement savings. Many people are still in student loan debt, so they defer beginning to save for retirement and have missed out on employee match programs.
Starting in 2024, Section 110 of the SECURE 2.0 Act helps employees with student debt to save for retirement by allowing employers to make matching contributions to their retirement plans, provided they make qualified student loan payments.
This applies to 401(k), 403(b), SIMPLE IRA, and section 457(b) plans. Talk to your employer about this option to help you start saving for retirement while still paying off student loans.
The 2024 updates to 529 plans provide families with flexibility and benefits when planning for education and retirement. Now, you can rollover unused funds to Roth IRAs without penalties, and there are more options for using 529 funds. Consulting a tax professional and considering other options like maximizing gift tax benefits can enhance your financial strategy.
Every step you take now can make a significant difference in shaping a brighter future. Enroll in a 529 plan today to make your family’s education and retirement goals a reality.
