Launched in 1996, 529 plans have long been considered the best way to save for your child’s college education. These government-backed investment accounts offer tax-free earnings and withdrawals that can be used for tuition and other qualified education expenses.
But the requirement that the money be used for education is a sticking point for some families. What if my child didn’t need the money for school? What if they reject higher education altogether?
That worry is now gone, as changes to retirement savings regulations that took effect on January 1 make it possible to roll over 529 plan funds into a Roth IRA account without tax penalty.
“This is a big deal,” Vivian Tsai, president of the College Savings Foundation, previously told CNBC. “Most people’s objection is, ‘What if I don’t use this money for education?'” Now you can use it for retirement. ”
Here’s what you need to know about 529 college savings plans, including what the changes mean for you.
A 529 college savings plan, also known as a qualified tuition program, is an investment account with tax-deferred earnings and tax-free withdrawals. Initially, the funds had to go towards post-secondary education, but in recent years it has expanded to include K-12 tuition, continuing education, apprenticeships and student loans of up to $10,000.
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Each state offers its own 529 plan, but most are available to all U.S. residents. In-state account holders enjoy special benefits, from tax credits to matching grants.
There is Mainly two types 529 of the plans: Education Savings Plans are education savings plans that are tax-deferred when used for education expenses and withdrawals are tax-free, and where the account holder can save money now to attend an educational institution in a designated state in the future. This is a prepaid tuition plan that allows you to pay tuition fees.
One of CNBC Select’s top picks is My529 (Utah), which has a variety of age-based portfolios that automatically rebalance to become more conservative as your child approaches college age. Fees are relatively low and there are no minimum contribution or balance requirements.
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Total asset-based expense ratio: 0.131% to 0.136% for my529 target date option. For customized static and age-based options, 0.130% to 0.455% depending on investment mix. 0.211% for stable value option
Although it does offer the Buckeyes their own tax breaks. College Advantage (Ohio) 529 plans are available to people living all over the country. According to our data, this is one of the best plans in terms of 10-year returns. SavingforCollege.comwith low-fee portfolios that can be age-based, risk-based, or custom designed.
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Total asset-based expense ratio: 0.145% to 0.435%
Previously, withdrawals not used for education expenses were subject to federal income tax, plus a 10% penalty on the income. As of January 1, 2024, However, unused funds in a 529 plan can be rolled over tax-free into a Roth IRA account.
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The changes to 529 plans are one of many updates to retirement savings brought about by the Secure 2.0 Act, passed in December 2022.
529 plans still have some limitations. The account must be open for at least 15 years before rolling over to a Roth IRA, and funds contributed within the past five years are not eligible. Rollover funds are subject to annual Roth IRA contribution limits and a lifetime transfer limit of $35,000.
What is the maximum amount I can contribute to a 529 plan?
Who controls the 529 plan?
Because a 529 plan is a custodial account, an adult can legally manage contributions, investments, and spending on behalf of a minor. The beneficiary can take over management of the account once she turns 18 years old.
Are there any fees associated with 529 plans?
All 529 plans have fees, which vary depending on the state sponsoring the account. In most cases, account holders pay an expense ratio, an annual fee based on a small percentage of the assets in the account. If you work with a broker, your expense ratio will likely be higher and you may also be charged a commission.
Although less common, some 529 plans also have enrollment fees, annual fees, or monthly account maintenance fees.
Do I have to pay gift taxes on contributions to a 529 plan?
can contribute in general Up to $17,000 per year (or $34,000 for a married couple) not subject to gift tax. Alternatively, he can make a one-time contribution of up to $85,000 ($170,000 for her for couples).
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New changes to 529 plan rules now allow 529 plans to be used not only for college education, but also for retirement.
CNBC Select’s mission is to provide quality service journalism and comprehensive consumer advice to help readers make informed decisions about their money. All articles are based on rigorous reporting by a team of expert writers and editors with extensive knowledge of financial products.. While CNBC Select earns commissions from affiliate partners on many offers and links, we create all content without input from commercial teams or outside parties and adhere to journalistic standards and ethics. We are proud of our products.
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