529 Education Savings Plan: What it is, How it works, Pros and Cons
As the cost of education rises, planning becomes crucial. One of the top tools to consider is the 529 Education Savings Plan, known for its tax advantages and potential for growth. This plan offers flexibility and control, unmatched by other educational savings tools. We will explore its functions, benefits — including the 2024 rollover options — and drawbacks.
What is a 529 Education Plan?
A 529 plan is a state-sponsor savings account, that offers tax benefits when used to pay for qualified educational expenses for a designated beneficiary. You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments. Anyone can contribute, and it has generous limits. If funds go unused, they can be transferred to an alternative beneficiary. However, its market value can fluctuate.
How Does It Work?
- The account owner initiates the plan for a beneficiary.
- Contributions don't have a minimum, but maximums differ by state.
- While there's a single account owner, anyone, regardless of their income, can contribute.
- Contributions grow tax-deferred. While in the account, there's no federal tax on the growth, and no income tax on the growth for qualified withdrawals.
- Gifts and State planning - gifts to 529 plans are partially exempt from federal gift tax. You can contribute up to $17,000 ($34,000 per couple) per beneficiary, or up to $85,000 over a five-year period ($170,000 for married couples) per beneficiary, without triggering the gift tax.
- Funds can be spent on the beneficiary’s tuition and other qualifying educational expenses. The specifics differ based on state and institution.
- If the beneficiary decides not to go to school, the account owner can shift the beneficiary to another family member without any tax implications.
2024 Rollover Options
From 2024, the SECURE Act 2.0 allows 529 plan beneficiaries to transfer funds to their Roth IRA tax and penalty-free. They can roll over up to $35,000 in their lifetime. However, this is subject to Roth IRA yearly contribution caps ($6,500 a year), and the 529 account should have existed for over 15 years.
Pros and Cons
Pros:
- Tax-deferred growth
- Tax-free withdrawals for qualified education expenses
- The account owner retains control.
- Generous contribution caps
- No age or income restrictions
- Portability of plans
- Beneficiary rollover to Roth IRA in 2024
Cons:
- 529 funds are tax-free only if used to pay for qualified educational expenses
- 10% penalty for non-qualified/early withdrawals
- Market values can fluctuate
Considering a 529 plan can be key in supporting your family's educational aspirations. Let us assist you and see if it aligns with your needs.
Contact: Marisa Ponti at 713-667-4026 Ext. 104 / mponti@ridgebackcm.com for a free consultation.