TAX PLANNING | 08/24/2024
A 529 plan is a powerful, tax-advantaged savings tool designed to help families save for education expenses. Whether for college or eligible K-12 expenses, these plans offer potential tax-free earnings and other significant benefits when used strategically. Starting in 2024, unused 529 funds can even be rolled into a Roth IRA for the beneficiary, adding another layer of flexibility to these plans.
When properly implemented, 529 plans can also be an effective part of estate planning, potentially reducing gift and estate tax liabilities. Here’s what you need to know about their features, rules, and benefits.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings account designed to encourage saving for education expenses. Contributions grow tax-free, and qualified withdrawals—used for tuition, fees, books, and room and board—are also tax-free.
Types of 529 Plans
- Prepaid Tuition Plans
Lock in today’s tuition rates for future attendance at public in-state schools. Some private and out-of-state institutions also accept these plans. - College Savings Plans
Allocate contributions into investment options, with growth depending on market performance. - State-Sponsored 529 Plans
Each U.S. state offers its own 529 plan (except Wyoming, which only offers 529 ABLE plans). Many states also offer tax benefits, such as deductions or credits, for contributions. - Brokerage 529 Plans
Managed through broker-dealers, these plans allow for more investment flexibility. - 529 ABLE Plans
Designed for individuals with disabilities, these plans allow tax-advantaged savings for disability-related expenses.
Key Rules for Contributions and Withdrawals
- Contributions
- Any adult can contribute to a 529 plan, including family members and friends.
- Contribution limits are set by states, often ranging from $250,000 to $550,000 per beneficiary.
- Contributions to one state’s 529 plan do not count against limits in another state.
- Withdrawals
- Tax-free when used for qualified education expenses like tuition, fees, and room and board.
- Nonqualified withdrawals are subject to income tax on earnings and a 10% penalty.
Unused Funds
- Rolling into a Roth IRA
Starting in 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary, subject to these conditions:- Lifetime rollover limit: $35,000.
- Contributions must comply with annual IRA limits.
- The 529 plan must be open for at least 15 years.
- Changing Beneficiaries
Unused funds can also be reassigned to another family member planning to pursue higher education.
Tax and Estate Planning Advantages
Contributions to 529 plans are removed from your taxable estate, making them an effective estate planning tool:
- Annual Gift Tax Exclusion
In 2024, individuals can gift up to $18,000 per beneficiary ($36,000 for married couples) without reducing their lifetime gift and estate tax exemption. - Five-Year Lump Sum Gifting
Individuals can contribute up to five years’ worth of annual exclusions in one lump sum—$90,000 per beneficiary ($180,000 for couples) in 2024—without triggering gift taxes. - Lifetime Exemption
For 2024, the federal lifetime gift and estate tax exemption is $13.61 million per individual. By using the annual exclusion and contributing to 529 plans, families can reduce their taxable estates significantly.
Investment Strategies
529 contributions must be made in cash, with funds allocated to available investment options. Choosing the right investment mix depends on factors like the beneficiary’s age and risk tolerance. Working with an advisor can help tailor the strategy to your goals.
How Our Tax Consulting Firm Can Help
529 plans are a versatile savings and tax planning tool, but the rules can be complex. Our tax professionals can help you:
- Navigate state-specific contribution limits and tax benefits.
- Maximize estate and gift tax planning opportunities through 529 contributions.
- Ensure compliance with IRS rules for contributions, rollovers, and withdrawals.
- Develop a comprehensive wealth strategy that integrates 529 plans with your overall financial goals.
Contact us today to learn how a 529 plan can help you save for education while optimizing your tax and estate planning.