What is a 529?

With college tuition rising at around 5%-6% annually, parents are always looking to stay prepared for college with their dollars today. On top of that, with the increasing burden of student loans, parents are seeking smart ways to save. With the goal being for college, one of the best vehicles to consider is the 529. Often, this account is overlooked because of some restraints. So let’s dive into this and see how this could work for your kids!

What Is a 529 Plan?

A 529 Plan is a tax-advantaged savings account to help families save for future education costs. One of the biggest advantages of a 529 Plan is its tax-free growth. If the money in the account is used for qualified education expenses, all earnings inside the account are tax-free, and withdrawals for those expenses are also distributed tax-free.

You can think of it like the "Roth" for education savings. Here are some of the top highlights of the account:

Key Perks of a 529 Plan

Contribution Limits
- You can contribute up to $18,000 per year (as of 2024) without triggering the federal gift tax. And there’s more—529 Plans allow for something called front-loading, where you can contribute up to 5 years' worth of contributions in a single year. This means you could potentially contribute up to $90,000 per contributor all at once. This can be especially useful for grandparents or relatives looking to give a lump sum gift. However, if this is done, you cannot contribute for another 5 years.
Potential for State Tax Deductions
- Many states offer an upfront tax deduction or credit for contributions to a 529 Plan. While it does not offer this on the federal level, few vehicles offer a tax advantage on the front end and back end if they qualify. To see if your state offers one, check out this blog here for 2024.
Flexibility with Beneficiaries
- One of the best aspects of a 529 Plan is the flexibility to transfer the funds to another beneficiary if your child doesn’t end up needing them. For example, if your first child decides not to attend college, you can change the beneficiary to another relative—like another child, sibling, niece, nephew, or even yourself—without incurring penalties. This ensures that your efforts are still put to good use.
No Time Limit for Withdrawals
- Unlike many other tax-advantaged accounts, there’s no time limit for when you need to withdraw funds from a 529 Plan. This gives families the flexibility to use the funds whenever the time is right.

The Catch

While 529 Plans are a fantastic tool for education savings, there’s an important con: if the funds aren’t used for qualified educational expenses, you’ll face ordinary income taxes on the earnings, along with a 10% penalty. This can make it costly if you end up needing the money for something other than education, which is all the more reason why having an open discussion with other accounts should be considered, like a taxable brokerage account, for example.

In addition, there are usually limited fund options available. Similar to a 401(k), there may be limited fund choice options available to choose from. You’ll want to review the options to ensure they align with your investment philosophy and be conscious of any associated fees. It is also worth noting that, like many assets owned, the 529 does hurt against financial aid as a parent's asset.

The New Rollover Feature

Starting in 2024, a new rule allows funds from a 529 Plan to be rolled over into a Roth IRA. This provides a great opportunity for families whose children don’t need the balance for educational purposes.

However, this new rule has specific requirements that must be met. Some of those include:

Key Points for the 529 to Roth IRA Rollover:

The 529 account must have been open for at least 15 years.
Contributions and earnings made to the 529 plan within the last five years before the rollover are not eligible for transfer to the Roth IRA.
The rollover must be made into a Roth IRA in the name of the 529 plan beneficiary, not the account owner.
You can roll over up to the Roth IRA contribution limit per year (currently $7,000 annually as of 2024).
The lifetime limit for 529-to-Roth rollovers is $35,000.
And more

While these limits may seem low at first, the new provision adds another layer of flexibility for parents and lowers their hesitations about contributing to their child's future!

The Bottom Line

While the 529 Plan isn’t the only option available for education savings, it’s one of the most tax-efficient and flexible vehicles for parents and families who want to take proactive steps against the rising costs of higher education. If education is your goal, the 529 offers a clear path to making those college dreams a reality.

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