A 529 college savings account isn't the sexiest thing in the world, but it does have some serious benefits when used to save for college. These benefits were strengthened even further last month with the passing of SECURE Act 2.0.
If you’re new to the college savings game, a 529 is a college savings account that has tax advantages when used to save for college.
Here’s a rundown of how it differs from a brokerage account:
The ability to use 529 college savings plans for tax free growth and withdrawals have made them a powerful tool. When starting your saving at a young age, the growth in the account can compound over the years… and while used to pay for college expenses, none of this is taxed. Unused savings can also be transferred to an eligible relative tax free.
The drawback to a 529 plan? What if your child doesn’t go to college? Or if you over-save into the plan? For withdrawals not used for qualified educational expenses, they are subject to taxation and a 10% penalty on the earnings portion (growth) of the account.
The IRS sweetened the 529 college savings tool with the passing of SECURE Act 2.0 that was signed into law by Biden this past December.
The largest change - A lifetime limit of $35,000 can be converted from a 529 plan into a Roth IRA.
What this means for you?
- Let’s say your child chooses an in-state public school over the private college that you’ve saved for
- If you have $35,000 leftover in your 529 plan, you can choose to convert the $35,000 into a Roth IRA for your retirement
Why is this so powerful?
The ability to convert funds earmarked for college into a tax-free retirement vehicle reduces one of the main drawbacks to a 529 plan --> Flexibility
The ability to take a college savings asset and transfer towards retirement savings, an area that many Americans lag in, is extremely valuable.
It is important to note, however, that $35,000 can be a drop in the bucket when it comes to the cost of college. With some private schools’ cost of attendance soaring upwards of $300,000 over the course of 4 years, $35,000 is not a large sum.
Have questions how these changes to 529 college savings plans may affect your college plan? Feel free to reach out!
All the best,
Andrew Holmes, Certified College Planning Specialist™
Check out my recent whitepaper: 5 College Planning Mistakes to Avoid
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 Effective in 2024, the 529 plan must be maintained for at least 15 years and the conversion amount cannot exceed the annual IRA contribution limit for each year