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529 plans have long been a hot topic for college education. Most Americans have heard of 529 plans and have an idea of how they work. Contributions are made after tax, can grow tax-free, and eventually be distributed tax-free if used for qualified education expenses. However, if the funds are used for any non-qualified purpose, federal taxes and a 10% penalty will be applied to the earnings.
Fortunately, the contributions are on a return basis, so they aren’t taxed. Regardless, these plans may not be very efficient if the funds aren’t used for qualified education expenses. When compared to a non-qualified account where the earnings are subject to short, or tax favorable long-term capital gains, the difference in value can be staggering.
It’s easy to see why 529 plans have lost some of their luster over the years. It has become more common for people to forgo saving into 529 plans because they fear the funds won’t be used for qualified expenses, and that could lead to taxes and penalties. For example, if we assume your child is academically gifted, does well enough in sports to receive a scholarship, or elects to start a business instead of attending college, you may end up with significant funds in the 529 that is subject to the taxes and penalties.
However, we anticipate a shift in the utilization of 529 plans for a good reason. Beginning in 2024 some new rules provide much-needed flexibility in these tax-preferred plans. Secure Act 2.0 paved the way for for 529 funds to be transferred tax-free to a Roth IRA in the name of the beneficiary if the funds aren’t needed for school. As you might imagine, however, there are some rules to consider:
- The 529 plan must be open for no fewer than 15 years
- The rollover amount is subject to the annual contribution limits for Roth IRAs ($7,000 for 2024)
- The transferrable limit is $35,000
This new rule has allowed the 529 plan to regain some of its appeal. By no means is it the only account you want to rely on, but it might be worth considering for some portion of savings goals that include education.  Because education is often one of the largest expenses for individuals and families, planning early  should not be underestimated.
Your team at OmniStar is well-equipped to help with all things education planning. Our advanced technology can help you solve for the right amount of savings to reach your educational goals, and everything else related to your financial planning needs. If you have questions or concerns regarding education planning we encourage you to contact us today..
