529s - You Have More Options Now

Thanks to legislation enacted over the past 5 years, our rating of a 529 has received a boost. The beauty of a 529 plan has always been the tax-deferred growth and the potential tax-free withdrawals for college. But….

Prior to 2017, this savings vehicle was pretty straight forward. You could use the funds for qualified higher education essential expenses—period. If you take the money for any other reason, you pay federal income taxes and a 10% penalty.

You now have actual options—even one that does involve paying for school. Let’s take a look:

1. 529s can be used for K-12 expenses up to $10,000—public, private or religious. Note: This could be an opportunity to take a tax deduction on your contribution at the state level, which effectively would make your tuition deductible.^1.

2. 529s can be used to pay off up to $10,000 of student loan debt per individual.
3. 529s can be used to pay for vocational and trade school
4. 529s can be used to pay for some international schools.
5. 529s can pay for apprenticeship programs, as well as any books, supplies or equipment needed.
6. 529s can fund ABLE accounts for the beneficiary or a family member with disabilities.
7. 529s will be able to be used for Roth IRA rollovers in 2024 and beyond. Up to $35,000 can be transferred to a Roth IRA, but there are a few caveats:
   1. The rollover limit is $6,500 per year
   2. The 529 plan must be at least 15 years old
   3. Any contributions made in the last 5 years are ineligible

Here are some additional gems you also may not know about a 529:

1. 529s could pay for off-campus housing up to the cost of room and board on campus.
2. 529s, likewise, could pay for food up to the cost of a meal plan in the room and board of on campus living.
3. 529s can pay for supplies outside of textbooks—paper, pencils, computers, software, etc. Note: The school will have a limit for books and supplies to use and ownership of a computer must be mandated by the school.
4. 529s can pay for equipment or services required for a special needs student to attend.
5. 529s can pay for internet service.

Perhaps most importantly, 529s benefits can be moved to a member of beneficiary’s family. So, if none of the above tips match the goals for the current beneficiary, try another one. Here is a list of the family members of the beneficiary defined by the IRS^4.:

1. Spouse
2. Child
3. Adopted child
4. Stepchild
5. Foster Child
6. Descendant of #2 through #5
7. Sibling
8. Stepsibling
9. Parent
10. Ancestor of a parent
11. Stepparent
12. Niece or Nephew
13. Uncle or Aunt
14.  In-Law
    1. Son or daughter-n-law
    2. Father or mother-n-law
    3. Brother or sister-n-law
15. The spouse of an In-law
16. First cousin

529s are still not a one size fits all vehicle and they are definitely complex. It may be wise to seek professional help from your Life Planner and take another look to see if one could fit your situation. And also look at how you could repurpose a 529 you currently have. Or… just pay the penalty and tax, right?

References:

1. Tax deduction is at state level and not available in all states
2. Apprenticeship program must be registered and certified with the U.S. Secretary of Labor
3. This limit is the annual limitation for ABLE accounts--$17,000 in 2023.
4. https://www.irs.gov/publications/p970#en_US_2016_publink1000178575