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As the costs at some colleges near $100,000 a year, families need a savings strategy they can bank on.
Financial experts and plan investors agree that 529 college savings plans are a smart choice for many. And, as of 2024, there are even more benefits, including higher contribution limits and the flexibility to roll unused money into a Roth individual retirement account free of tax penalties.
“There are three pretty significant changes this year,” said Vivian Tsai, senior director of education savings at TIAA and chair emeritus for the College Savings Foundation, a nonprofit that provides public policy support for 529 plans.
Whether the funds are for college or vocational studies, she said, “529 plans are better now than they’ve ever been before and they’re more flexible.”
Here’s a breakdown of everything you need to know.
Benefits of a 529 college savings plan
1. Tax deductions or credits for contributions
Even before recent changes, there were already many advantages to a 529 plan. In more than half of all U.S. states, you can get a tax deduction or credit for contributions. Earnings grow on a tax-advantaged basis, and when you withdraw the money, it is tax-free if the funds are used for qualified education expenses.
A few states also offer additional benefits, such as scholarships or matching grants, to their residents if they invest in their home state’s 529 plan.
2. New Roth IRA rollover rules
As of 2024, families can roll over unused 529 plan funds to the account beneficiary’s Roth IRA, without triggering income taxes or penalties, as long as the 529 plan has been open for at least 15 years.
That change follows the Secure Act of 2019, which let 529 users put some of the funds toward their student loan tab: up to $10,000 for each plan beneficiary, as well as another $10,000 for each of the beneficiary’s siblings.
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Previously, tax-advantaged withdrawals were limited to qualified education expenses, such as tuition, fees, books, and room and board. The restrictions loosened in recent years to include continuing education classes, apprenticeship programs and student loan payments. But now, 529s offer much more flexibility, even for those who never go to college, Chris Lynch, president of tuition financing at TIAA recently told CNBC.
“A point of resistance that potential participants have had is the limitation around, what happens if my kid gets a scholarship or decides they’re not going to college,” Lynch said.
In the latter case, you could transfer the funds to another beneficiary or withdraw them and pay taxes and a penalty on the earnings. If your student earns a scholarship, you can typically withdraw up to the amount of the scholarship penalty-free.
However, the added benefit of being able to convert any leftover funds into a Roth IRA tax-free after 15 years, up to a limit of $35,000, “helps to eliminate that point of resistance,” he said.
3. Higher maximum contribution limits
The amount you can contribute to a 529 plan is higher in 2024. This year, parents can gift up to $18,000, or up to $36,000 if you’re married and file taxes jointly, per child without those contributions counting toward your lifetime gift tax exemption, up from $17,000 in 2023.
High-net-worth families that want to help fund a family member’s higher education could also consider “superfunding” 529 accounts, which allows frontloading five years’ worth of tax-free gifts into a 529 plan.
In this case, you could contribute up to $90,000 in a single year, or $180,000 for a married couple. But then you wouldn’t be able to give more money to that same recipient within a five-year period without it counting against your lifetime gift tax exemption.
“If you have the means, that’s a big deal,” Tsai said.
A larger lump-sum contribution upfront may potentially generate more earnings compared with the same size contribution spread out over a few years because it has a longer time horizon, according to Fidelity.
4. New grandparent ‘loophole’
A new simplified Free Application for Federal Student Aid rolled out at the end of last year, with added benefits for grandparents who own 529 accounts for their grandchildren.
Under the old FAFSA rules, assets held in grandparent-owned 529 college savings plans were not reported on the FAFSA form, but distributions from those accounts counted as untaxed student income, which could reduce aid by up to half of that income.
As part of the FAFSA simplification, students no longer have to answer questions about contributions from a grandparent, effectively creating a “loophole” for grandparents to fund a grandchild’s college fund without impacting their financial aid eligibility.
“In 2024, the grandparent penalty goes away, so 529 plans prove themselves, once again, to be a really exceptional way to save,” Tsai said.