Learn How to Make the Most of Your 529 Plan Savings
For parents looking to save for their children’s education, a 529 plan is a popular choice. These state-run vehicles provide broad investment options, high contribution caps, and generous tax breaks. Now, with the recent SECURE 2.0 Act, account owners have even more flexibility.
First, it’s important to know that there are two main types of Section 529 plans. Prepaid tuition plans allow for future tuition payment at today’s price, while college savings plans offer higher investment potential. Each state sets its own limits, but most reach well into six figures.
Most college savings plans offer a range of risk-based asset allocation portfolios managed by professionals, geared to the child’s current age or the year they will enter school. But that’s not all – you can also benefit from a range of tax breaks. Contributions to a 529 plan are not subject to federal income tax, and some states offer tax deductions or incentives. Qualified distributions from a 529 plan for education expenses are tax-free, including the growth on the investment.
You might be able to roll over the account funds for the benefit of a successor beneficiary (for example, a younger sibling) if the child doesn’t go to college or ultimately decides to attend school in another state. You can do the same with unused money from an older child’s account and transfer it to a younger child’s account.
Now, the SECURE 2.0 Act provides another option. Starting 2024, individuals can roll over up to $35,000 of unused 529 plan funds to a Roth IRA without paying taxes. The account has to be open for a minimum of 15 years in order to be eligible.
Contributions to 529 plans may be subject to federal gift tax, but the annual exclusion can offer protection. The annual gift tax exclusion allows for up to $17,000 ($34,000 for couples) per year per beneficiary. Tax law allows a one-time gift of 5 years’ worth of contributions to a 529 plan without affecting gift taxes. The gift is treated as if it were spread out over a five-year period.
Additionally, other recent tax legislation permits using a 529 plan to pay up to $10,000 in elementary, secondary school tuition. These schools may be public, private, or religious. This means 529 plans aren’t just for higher education any more.
If you’re considering opening a 529 plan, it’s worth examining how the SECURE 2.0 Act may benefit you. Talk to a financial advisor to learn more about the latest of your options for saving for your child’s future.
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