The Skinny on 529"s
Saving or paying for college can be expensive.
Tax-advantaged 529 plans can blunt the cost. Also, you have more options for 529 funds… thanks to various legislative changes in recent years.
Contributions to 529 plans are treated as gifts to the beneficiary.
And you’re able to front-load up to five years’ worth of tax-exempt gifts…$85,000 in contributions per beneficiary this year ($170,000 if your spouse joins in). If you give the maximum, you’ll be treated as gifting $17,000 (or $34,000) to that beneficiary in each of 2023 through 2027.
A rule change makes it easier for grandparents to own and fund 529s…
Without jeopardizing the grandchild’s future eligibility for financial aid. Under financial aid rules now in place, distributions from 529s owned by anyone other than a parent or student are treated as cash support, which can reduce eligibility for a student’s financial aid by as much as 50% of the 529 distributed amount. New rules, which first take effect for the 2024-25 school year, resolve this problem. Students will no longer have to report 529 distributions from non-parent owner 529s when filling out the Free Application for Federal Student Aid, or FAFSA. Ditto for cash gifts received by the student from non-parent family members.
Distributions from 529 plans used for college are tax-free.
Eligible expenses include the cost of room and board for students enrolled at a college or university at least half-time, tuition, books, supplies, fees, computers and internet access.
529 plans can help pay for K-12 education as well.
Tax-free distributions of up to $10,000 per student per year can be taken from 529 accounts to pay tuition for elementary and secondary private and parochial schools. The state-tax treatment of these payouts doesn’t always follow federal law, so be sure to check with your state.
What if the beneficiary of the 529 account decides not to go to college…
Or if he or she does go to college, and there are funds remaining at the end? There are options for using the leftover money: Keep the funds in the account for grad school, etc. Use the 529 money to pay for certain apprenticeship programs. Roll over leftover funds to a 529 plan for another family member’s education needs. Use up to $10,000 tax-free to help pay off some of the beneficiary’s college debt. (This $10,000 is a lifetime limit.) Roll over funds tax-free from a beneficiary’s 529 plan to an ABLE account for a disabled beneficiary or the beneficiary’s siblings. SECURE 2.0 provides another helpful alternative for leftover 529 funds.
Starting in 2024, some 529 funds can be rolled over tax-free to a Roth IRA for the beneficiary in a trustee-to-trustee transfer.
But there are lots of rules to follow. There’s a $35,000 lifetime rollover cap. The 529 account must have been open for at least 15 years, with the same beneficiary. Annual rollover amounts can’t exceed the annual contribution limit for Roth IRAs, which is $6,500 for 2023. And 529 contributions made in the prior five years are ineligible for the rollover.
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