Planning for Success: 529 Plans & The SECURE Act 2.0
By Mahoney
529 plans are an increasingly popular tool you can use to save money for a loved one’s future educational endeavors. However, given the increased popularity of alternatives to higher education and changes from the SECURE Act 2.0, the decision to invest in a 529 plan is often not as straightforward as it has been in years past.
What is a 529 Plan?
A 529 Plan – named after the section of the federal tax code from which it originates – is a tax advantaged savings account created with the intention of paying for a beneficiary’s future education expenses. While these plans were initially limited to only the costs of higher education, as the years have gone on, they have been expanded to encompass the costs of K-12 education, apprenticeship programs, and even up to $10,000 in student loan debt repayment.
Money is deposited into the plan post-tax and allowed to grow entirely tax free until withdrawals begin, which are also tax free if used for qualified education expenses (though withdrawals are subject to income tax and a 10% penalty if not withdrawn for this purpose). Further, some states – including Minnesota – allow their residents tax deductions or credits on their state tax returns for contributions to their state-administered 529 plans.
529 plans are typically opened by parents for their children or grandparents for their grandchildren, but there are generally no restrictions on who can open an account.
New Considerations from the SECURE Act 2.0
529 plans have seen consistent growth in popularity over the past couple of decades. However, recent considerations have caused a bit of a dip: with the costs of education increasing daily, will the money in this account even make a dent? On the other hand, what if my child obtains a large scholarship and doesn’t need to use all the funds in the account, or decides not to pursue higher education or an apprenticeship at all?
In response to these considerations, the SECURE Act 2.0 added a new benefit to 529 plans. Starting in 2024, 520 plan beneficiaries will have the option to roll over some of these funds to a Roth IRA. Such transfers must follow the following stipulations:
- Eligible plans must have been open for at least 15 years.
- Transfers to a Roth IRA must not exceed yearly Roth contribution limits (transfers from a 529 plan are combined with other contributions for this limitation) and earned-income limits.
- The beneficiary of the 529 plan must be the owner of the IRA.
- Transfers to a Roth IRA must not include funds deposited into the 529 plan int he previous five tax years.
- The lifetime limit on such transfers is $35,000.
Conclusion
As Congress phrased it in the text of the SECURE Act 2.0, “families who sacrifice and save in 520 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education.” While some of the stipulations of this added benefit may still cause some to be wary – for example, a plan opened today would not be eligible for such a transfer until 2039 at the earliest – it still helps alleviate some of the most popular concerns with 529 plans.
If you have any questions about your 529 plans and how they affect your tax planning strategies, don’t hesitate to reach out to Associate Manager Tyler Sauve, CPA for more information.
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