Managing wealth involves a forward-thinking approach, especially when it involves the future of our children. The 529 account, named after its corresponding tax-code provision, stands out as the most dominant college-savings plan available today. With net assets of $388 billion by the end of 2022, it has grown significantly in popularity. Savers can invest contributions that grow free of federal and state taxes, and withdrawals are tax-free when used for eligible education expenses.
The Basics of Contributions
While there’s no federal tax deduction for your contributions, many states offer enticing tax breaks. Always consult with a financial advisor or tax professional to understand your state’s specific benefits.
However, there are some contribution limits to be aware of:
- Annual Limits: There isn’t a specific annual contribution limit for 529 plans. Instead, contributions must avoid gift tax implications. For 2023, you can contribute up to $17,000 per year ($34,000 for couples) without incurring the federal gift tax.
- Lifetime Limits: Depending on the state, 529 plans have a lifetime contribution limit ranging from $235,000 to $550,000. It’s crucial to be aware of these limits as they include all total contributions, not just your own.
- Five-Year Gift Tax Averaging: For those wishing to contribute more upfront, you can gift up to $85,000 ($170,000 for couples) at once by treating it as if it were spread over five years.
Utilizing 529 Funds: When and How?
Funds from a 529 plan can be used at virtually all accredited U.S. colleges, universities, and many trade schools. Internationally, about 400 postsecondary institutions are also eligible, including Oxford, Cambridge, and McGill.
A lesser-known fact about 529 plans is that, while they are predominantly associated with higher education, they can also be used for K-12 tuition expenses at private, public, or religious schools. Starting in 2023, for states that adopt this provision, parents can make catch-up contributions to reimburse themselves for prior K-12 tuition costs, making the plan more versatile than ever.
Eligible expenses include tuition, fees, books, supplies, and specific equipment like computers. Room and board are also covered if the student is enrolled at least half-time. Interestingly, up to $10,000 from the 529 can be used to pay off student loan debt for the beneficiary and their siblings.
One of the plan’s underappreciated features is the ability to change beneficiaries. If the primary beneficiary doesn’t utilize all the funds, it can be switched to another family member, ensuring the investment isn’t wasted.
Withdrawing From Your 529: Navigate with Care
Proper record-keeping is crucial when withdrawing from your 529 plan. If the IRS audits you, you’ll need to provide documentation to back up your claims, especially for atypical expenses. It’s also worth noting that if a payout exceeds the total eligible expenses, you may owe income tax plus a 10% penalty on the earnings.
SECURE 2.0: A Game-Changer
The traditional 529 plan was often seen as a gamble. Once you invested, those funds were locked in for educational purposes. However, the introduction of SECURE 2.0 is set to change this.
Starting in 2024, excess funds in 529 plans can be rolled into Roth IRAs. This change alleviates the fear of over-contributing to a 529 plan and provides more flexibility for parents and grandparents.
With a $35,000 lifetime cap on transfers to a Roth IRA, there are specific steps and considerations to make the most of this opportunity. For instance, considering the current annual Roth IRA contribution limit and adjusting for expected returns, one could strategically contribute to the 529 plan to hit the cap precisely. By understanding these nuances, families can turn their 529 plan into a significant nest egg for their children’s future.
Conclusion
The world of 529 plans is evolving, offering more flexibility and options for a family to secure their child’s future. At Moran Wealth Management®, we’re here to guide you through these changes and ensure your financial strategies are optimized for your family’s unique needs.
Whether you’re just starting your 529 plan or looking to make the most of the new Roth IRA rollover opportunities, now is the time to act. Call us today at (239) 920-4440 to schedule a consultation to review your 529 plan today.
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