529 plans offer plenty of tax savings to those saving for educational goals. However, uncertainty about how these contributions will be used, particularly if the beneficiary doesn’t attend college or doesn’t need all the 529 plan funds, has stopped some parents from saving more or using 529 plans altogether.
A new Saving For College survey finds that the 529 to Roth IRA rollover benefit that went into effect in 2024 can potentially increase 529 plan account openings and contributions.
Awareness and Impact of the Roth IRA Benefit
The survey, conducted with responses from 1,133 parents and grandparents who visit or subscribe to the Saving For College email list, found that 57% of respondents are now more likely to increase their 529 plan contributions due to the Roth IRA rollover benefit that went into effect in 2024. Additionally, 72% of 529 plan holders are aware of the new ability to roll over unused 529 funds into a Roth IRA. Among the 14% of respondents who don’t yet have a 529 plan, 76% say this benefit makes them “much more likely” or “somewhat more likely” to open a plan.
ISS Market Intelligence estimated that in January and February 2024, $34 million in assets from 4,992 529 plan accounts were transferred to Roth IRA accounts. The average amount transferred was just under $7,000, which is within the annual Roth IRA contrition limit of $7,000 for those under age 50 in 2024. For comparison, there were over 16 million 529 plan accounts with assets of nearly $500 billion in the first quarter of 2024.
These figures demonstrate the interest in using leftover 529 funds in an alternative way and reflect the potential future impact on financial planning strategies for educational savings.
Drivers of 529 Plan Adoption
While Roth IRA rollovers impact 529 adoption, other factors still rank higher in terms of influence on opening a 529 plan account. The majority of respondents indicated that “financial security for a child’s education” (86%) and “tax advantages” (69%) were the most influential factors in their decisions to open a 529.
Less influential factors included “flexibility in usage of funds” (31%) and the “ability to roll over funds into a Roth IRA” (23%). Surprisingly, only 14% of respondents said the ability to “use funds to pay off student loans” was a factor that influenced them.
Knowledge Gaps in 529 Plans
Our survey revealed that the majority of respondents don’t feel “very knowledgeable” about 529 plan benefits. 59% of respondents who have 529 plans indicated that they feel only “somewhat knowledgeable” about plan benefits, while 9% and 2% felt “not very knowledgeable” or “not knowledgeable at all,” respectively.
When it comes to the student loan repayment benefit, 58% of respondents who have 529 plans indicated that they did not know 529 plans can be used to pay off student loans of up to $10,000 per beneficiary. For respondents who do not have an open 529 plan, 81% said they were unaware of this benefit.
Concerns and Barriers to Funding 529 Plans
Despite the ability to use 529 plans to fund a Roth IRA or pay off student loans, respondents remained concerned about various aspects of opening a 529 plan. Over one-third of respondents indicated that “uncertainty about a child’s future education plans” concerned them about opening a 529. At the same time, 32% said that 529 plan fees and expenses concerned them.
About 1 in 4 respondents indicated that “investment risks” (26%), “limited usage of funds” (25%), or “uncertainty if I can save enough to make it worthwhile” (25%) were concerns they had about opening a 529 plan as well.
Conclusion
The results of our latest survey highlight the significant influence that the new Roth IRA rollover benefit has on 529 plan adoption and contributions. With 57% of current 529 plan holders indicating a greater likelihood of increasing their contributions and 76% of non-holders more likely to open a plan, this benefit is poised to drive growth in 529 plan usage.
Tax advantages and financial security remain the primary motivators for opening a 529 plan. Yet, the added flexibility of rolling over unused funds into a Roth IRA is proving to be a compelling incentive. However, knowledge gaps and concerns about fees, investment risks, and future education plans still present barriers that need addressing.
The survey highlights the importance of continued education and outreach to ensure that all potential users thoroughly understand the benefits and workings of 529 plans. Addressing these knowledge gaps and alleviating concerns can further increase the attractiveness of 529 plans and help more families achieve their educational goals.
Methodology
This survey was conducted online by Saving For College from June 28th to July 10th through a poll conducted through the Alchemer platform. Respondents were recruited from the Saving For College email newsletter list and on the savingforcollege.com website. 1,133 responses were received, of which 60% were from parents and 32% were from grandparents saving for a child’s education. 846 respondents indicated that they currently have a 529 plan, and 134 responses indicated they do not have a 529 plan.
