The 529 – more than a college savings plan

As tuition and education costs rise, planning for your children's or beneficiaries' educational future is crucial. For many parents still struggling with the nightmare of student loans, saving for their children's education is a cost-effective option.

A 529 plan is an important solution to securing your child's educational future because the government-sponsored initiative offers tax advantages for contributions to the account.

The basics

Every state offers at least one 529 plan. However, tax breaks for contributions are not mandatory, so they vary from state to state. Many states offer a tax deduction or tax credit for contributions to a 529 plan, allowing parents to lower their tax liability by saving for their children's education. With most 529 plans, contributions are taxable, money in the account grows tax-free, and withdrawals are tax-free when used for qualified education expenses.

Kindergarten to 12^th Class Private lessons

Recent changes in the law allow you to pay tuition with 529 plans for qualified kindergarten through 12^th Private Grade 1 schools. The spending limit per beneficiary is $10,000 per year, but the payment only covers tuition, not other school-related expenses. Tax implications vary from state to state. Check your state's tax laws to verify that pre-K through 12th grade withdrawals are treated the same as college withdrawals.

You can convert unused or unneeded benefits into a Roth IRA

The latest development in 529 plans is that you can transfer up to $35,000 per beneficiary of unused or unneeded benefits to a Roth IRA account in the beneficiary's (student) name. The provision provides tax relief for people who had to pay taxes or penalties on leftover funds in their 529 plans.

The transfer must follow Roth conversion rules, so you can't exceed the annual Roth contribution limit of $7,000 per year for 2024. The beneficiary must also have earned income equal to or greater than the amount transferred. You can't transfer the entire $35,000 at once.

The 529 plan account must be open for 15 years to be eligible for a Roth conversion. A change in beneficiaries within the life of the account can reset the clock. Additionally, you can only convert funds that have been in the 529 plan for at least five years.

Your modified adjusted gross income (MAGI) determines your eligibility and contribution amount to a Roth IRA. In 2024, individuals making less than $161,000 and married individuals filing jointly with a MAGI of less than $240,000 are eligible to contribute to a Roth IRA. Your contribution amount is reduced if your income is within the limit.

The rule does not apply to converting a 529 plan to a Roth IRA because income limits do not apply directly. You can take advantage of this provision if your income is too high, making you ineligible to open a Roth IRA account or make maximum contributions. In theory, if you have a high income, you could set aside money in a 529 plan and convert the account to a Roth IRA in 15 days. Years.

The 529 is a great multi-generational estate plan

Account holders of 529 plans have the freedom to change beneficiaries at their discretion, so if you open an account for your child and overfund it, you can transfer the balance of the account to your grandchild and fund it even further. Your money can always be put to good use for your beneficiaries. This allows for true intergenerational education planning with tremendous tax deferral benefits.

Consider your options

The 529 plan offers a really attractive way to save for your child's education, but it is certainly not the only option. Sit down with a financial planner who will better understand your goals, consider your current tax situation, and model your potential future financial life to determine which vehicle(s) will give you the most appropriate, tailored approach to support your child's future education.

Ben Soccodato And Chris Kampitsis Head The SKG team of Barnum Financial Group in Elmsford.