Recent Tax Changes Boost 529 Plan Benefits Eagle Wealth Management Group

529 plans, the popular tax-advantaged savings accounts for education expenses, have become even more attractive in recent years thanks to a series of federal tax law changes. These modifications have expanded the versatility of 529 plans, making them a more powerful tool for families planning for educational expenses.

What is the 529 Plan?

A 529 plan is a tax-advantaged investment account designed to encourage saving for education expenses. Named after Section 529 of the Internal Revenue Code, these plans offer significant financial benefits for families planning for future educational costs.

Key features of 529 plans include:

  • Tax advantages: Earnings grow tax-free, and withdrawals for qualified education expenses are not subject to federal income tax.
  • Flexibility: Funds can be used for a wide range of educational expenses, including college tuition, room and board, books, and supplies. Recent changes have expanded usage to K-12 tuition, apprenticeship programs, and even student loan repayment, which we will cover in the next section.
  • High contribution limits: Most plans allow substantial contributions, with lifetime limits often exceeding $300,000 per beneficiary.
  • Control: The account owner maintains control of the funds, not the beneficiary.
  • Beneficiary changes: You can change the beneficiary to another qualifying family member without penalties.
  • State tax benefits: Many states offer additional tax deductions or credits for contributions.
  • Low impact on financial aid: 529 plans generally have a minimal effect on eligibility for need-based financial aid.

These plans come in two types: prepaid tuition plans and education savings plans. While specific features can vary by state, 529 plans have become a popular and effective tool for families to save for future education expenses, which have been expanded upon in recent years.

K-12 Education Now Included

One of the most significant changes came with the 2017 Tax Cuts and Jobs Act (TCJA). Previously limited to post-secondary education, 529 plans can now be used for K-12 tuition expenses. Parents can withdraw up to $10,000 per year tax-free for these costs, aligning 529 plans more closely with Coverdell Education Savings Accounts (ESAs). However, 529 plans maintain their edge with higher contribution limits and no income restrictions for contributors.

New Options for Apprenticeships and Student Loans

The 2019 SECURE Act further expanded 529 plan benefits. Account holders can now use funds to pay for registered apprenticeship programs, covering fees, books, supplies, and equipment. Additionally, up to $10,000 (lifetime limit) can be used to pay off student loan debt for the account beneficiary or their siblings.

Grandparent-Owned Accounts Get a Boost

Starting with the 2024-2025 school year, distributions from grandparent-owned 529 plans will no longer be considered untaxed income for the student on the FAFSA. This change eliminates a potential reduction in financial aid eligibility, making grandparent contributions more attractive.

Roth IRA Rollovers Coming in 2024

The SECURE 2.0 Act of 2022 introduces another exciting option: starting in 2024, up to $35,000 from a 529 plan can be rolled over into a Roth IRA for the account beneficiary. This provision offers a solution for families concerned about overfunding 529 accounts.

Existing Benefits Remain

These new features complement the existing tax advantages of 529 plans:

  • Tax-deferred growth
  • Tax-free withdrawals for qualified expenses
  • Potential state tax deductions or credits for contributions
  • Ability to change beneficiaries without tax consequences
  • Generous gift tax provisions

Recent legislative changes have significantly enhanced the flexibility and utility of 529 plans. With expanded uses for K-12 education, apprenticeships, student loan repayment, and even retirement savings, these accounts offer families more options than ever for tax-advantaged education planning. But as always, when applying these tools to your unique situation, it could be wise to talk with financial professionals like us to gain a comprehensive understanding of your options and expectations.

 

 

Financial Planning and Advisory Services offered through Eagle Wealth Management Group Inc, a Registered Investment Advisor.  Brokerage services offered through Concorde Investment Services, LLC, Member FINRA/SIPC.  Eagle Wealth Management Group Inc. and Concorde Investment Services, LLC are not affiliated entities under common ownership.SWG 3991712-1124

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