Observed across the U.S. on May 29th, National College Savings Day or 529 College Savings Day was created to promote awareness of the 529 plan type and encourage families to save toward education expenses.
In 1996, legislation was introduced by Senators from Florida and Kentucky where a bipartisan effort was made for tax relief of these savings plans resulting in the creation of section 529 of the Internal Revenue Code under the Small Business Job Protection Act. From there, amendments to the tax relief as well as how the money inside of a 529 savings plan can be spent have changed to meet the need of the times: college expenses have significantly increased but so too have wages. Through the latest changes in the SECURE Act 2.0, we have the most current usage of a 529 college savings plan. Below, I will explain how different 529 savings plans can be used and how to act now.
What is a 529 College Savings Plan?
The two types of 529 college savings plans are your state-run college pre-paid system and a portable 529 college savings plan where individuals manage their own growth. These funds cover qualified expenses for education such as tuition, room and board (dormitory and meal plan), peripherals such as laptops and calculators, and other required expenses dictated by a school. Pre-paid plans vary by state as they are dictated by the university system. The 2024 Florida Pre-paid cost for a full 4-year tuition plus room & board is $63,500. Payment for the pre-paid plan can be through a payment plan or lump-sum deposit.
Portable 529 college savings plans are only limited by the contribution gift tax or the maximum expense by state. For example, the Florida 529 College Savings plan maximum contribution for 2024 is $418,000 whereas the Wisconsin 529 contribution maximum is $567,500. That means contributions cannot exceed the amount of the most expensive school in that state (University of Miami for FL and Beloit College for WI). The balance of the 529, however, can exceed this amount through growth of the portfolio. Also, these plans are transferable to other beneficiaries such as siblings, cousins, nieces, nephews, among others.
What Changes Were Made to 529 Plans in the SECURE Act 2.0?
Recently, 529 college savings plans were meant for higher education expenses (undergraduate and graduate/master level degrees). As wages rose and tuition with it, other plans such as Coverdell plans that helped cover costs of private school were dissolved and 529 plans were then able to be used for primary school expenses.
An education savings loophole had presented itself from an unknown source, Roth IRAs. Many do not know that contributions from Roth IRAs can be removed at any time from the account since those contributions were already taxed previously; only the gains were locked in unless the owner wanted to pay a 10% penalty on those gains if not held for five years or had attained age 59 ½. SECURE Act 2.0 stated that unused 529 college savings plan assets could be converted to a Roth IRA if the plan existed for at least 15 years with the same beneficiary, and the transfer cannot exceed $35,000. Also, the amount transferred must meet or be below the amount of the beneficiary’s taxable income in that year. Once this transfer occurs, however, the assets are locked in for the beneficiary in their name as a retirement account.
Is a Pre-paid 529 or 529 College Savings Plan Right for My Child or Grandchild?
For pre-paid plans, the child is somewhat locked into attending a state college or university in their state. However, most states offer reciprocity of assets or transferability. Be careful, because not every state offers the same degree or class schedule, and credits may not transfer over.
For 529 college savings plans, most states offer some tax relief through deduction for contributions. Nine states do not have state income tax, so residents of those states do not benefit from choosing a 529 plan from their state. For example, Florida residents can choose a 529 plan from any state as the state does not have a state income tax thanks in part to a robust tourism industry. Most mutual fund companies offer stateless 529 plans such as Vanguard, Fidelity, and BlackRock. Find a plan that suits your needs or reach out to a trusted advisor to help you choose.
If you are looking for trustworthy advice, you may be surprised to know that a fiduciary advisor is ready to help you. Contact us to learn more. You will be glad you did.