The 411 on 529’s

Financial Life Planning for Busy Parents

When it comes to saving for education, 529 accounts have long been a go-to option for many families. These tax-advantaged accounts allow you to set aside funds for educational expenses, and any earnings within the account grow tax-free. While they have been traditionally associated with saving for college, Congress has recently expanded the horizons of 529 accounts, making them an even more versatile tool for financial planning.

We’ve done a number of episodes on 529’s. In episode 55, we talk about how to pay for education expenses. Then we do a deeper dive into education savings in episode 83 and round it all out with an All About 529’s breakdown in episode 84. Check those out if you haven’t already, because today we will be talking about 529’s as a potential savings vehicle for retirement.

First things first, 529s in brief: A 529 account is a tax-advantaged savings plan designed to encourage saving for future education costs. These accounts are sponsored by states, state agencies, or educational institutions and come in two primary types: prepaid tuition plans and education savings plans.

529 Use Cases

Initially, 529 accounts were created to cover qualified higher education expenses such as tuition, fees, books, and computers. However, their utility has expanded significantly over the years.

1. Qualified education expenses (for more, see the US News Article from 2021):
2. Traditional 4-year college costs, 2-year colleges, graduate schools, and trade schools
3. Books and computers
4. Here's a significant development: off-campus housing and rentals are now qualified up to the cost of room and board on campus, along with food expenses
5. K-12 Education: The Tax Cuts and Jobs Act (TCJA, 2018) expanded the use of 529 plans to include covering up to $10,000 per student in tuition for public, private, or religious elementary or secondary schools.
6. Paying Off Student Loan Debt: The Secure Act 2.0 (2022) introduced a provision allowing individuals to use 529 funds to pay off up to $10,000 in student loan debt.
7. Funding Roth IRAs: Yes, you read that correctly! Perhaps the most exciting development is the ability to transfer $35,000 (total) from a 529 account to a Roth IRA belonging to the 529's beneficiary. This can serve as an "escape hatch" option to fund a Roth IRA thanks to an update to the Secure Act 2.0 which will go into effect in 2024.
8. To execute this transfer, the 529 account must have been open for at least 15 years.
9. Only funds that have been in the 529 for at least 5 years are eligible for the transfer.
10. The transfer must be a direct conversion from one institution to another.
11. The annual Roth IRA contribution limit and eligible earnings will apply, but there are no income limits.

Maximizing the 529

1. A “poor man’s Dynasty Trust”:
2. For those with the means, opening a 529 account today with a $15,000 contribution can potentially grow to $35,000 in fifteen years, assuming a growth rate of 7%. This can be a smart strategy for wealthy families to fund Roth IRAs for their children or grandchildren.
3. Personal Roth IRA:
4. Consider opening a 529 account for yourself when you're younger and have fewer expenses. You can be both the owner and beneficiary.
5. In 15 years, when you might have more expenses and a higher income, you can use the funds in the 529 account to "contribute" to your Roth IRA.

Leftover 529s

If you find yourself with leftover funds in your 529 account, you have options. You can use the money for yourself, pass it on to another beneficiary, or withdraw the money. If you choose to withdraw funds, you'll typically pay taxes on the earnings, plus a 10% penalty on those earnings.

529 accounts have evolved into a versatile financial planning tool that goes beyond college savings. They now offer flexibility for covering various educational expenses, paying off student loan debt, and even funding Roth IRAs. Understanding these expanded uses can help you make the most of your 529 account and secure a brighter financial future for yourself and your loved ones.