Not Your Grandparents’ 529

When it comes to planning for your education, there is no better vehicle than a 529. A 529 is a tax-advantaged account designed to help pay for education. 529 Plans grow tax-deferred, and withdrawals are tax-free if they are used for qualified educational expenses. The downside if proceeds are not used for qualified educational expenses, any earnings will come out as ordinary income and a 10% penalty is tacked on. However, recent legislative changes now allow for greater flexibility with leftover or unused 529 plan funds!

As a financial planner, it is tough to make a recommendation for a client to fund a 529 with significant dollars. The allowable uses of the funds are so narrowly defined that it really just does not have much practical value outside of one specific use. In my opinion, there are just too many variables and unknowns that leave the account holder without options. What if the 529 beneficiary gets a significant scholarship? What if the beneficiary opts out of higher education? What if college becomes free or reduced? What if, what if, what if? Fortunately, legislation has really expanded options over the last few years and, dare I say, made funding a 529 palatable.

The first change happened in 2019 with the passing of the Secure Act. This opened the door for 529s to not only pay for qualified education expenses, but to also allow for tax and penalty free distributions to pay up to $10,000 of student loan debt. This is a welcomed addition, but in my opinion, it was still not enough. Secure Act 2.0 passed on December 29, 2022, opened the door even wider. Starting in 2024, you can now make tax and penalty free rollovers from 529’s into a Roth IRA! There are, of course, rules (open for at least 15 years) and limits ($35,000 lifetime), but this certainly helps with any of the “what if” scenarios.

Anytime you make decisions for 10-15 years into the future, there will always be uncertainty. Laws or the cost of education could change, or the beneficiary on the 529 could end up not attending a higher education institution. These recent legislative changes allow for some of that uncertainty to dissipate. There are now options and flexibility, which brings opportunities for planning.

Written by Kyle Cooper

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