529 College Savings Plans: Your Questions Answered

What is a 529 Plan? 

A 529 plan is a tax-advantaged savings account designed primarily for education expenses. These state-sponsored plans allow your investments to grow tax-free. Withdrawals are also tax-free when used for qualified education expenses such as tuition, books, room and board, and required equipment. 

Recent Changes to 529 Plan Rules 

The SECURE 2.0 Act brought significant changes to 529 plans, making them more flexible than ever. Starting in 2024, unused funds in a 529 account (opened at least 15 years ago) can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth IRA contribution limits and a lifetime rollover cap of $35,000. 

This change addresses a common concern: "What if my child doesn't need all the money for education?" Now, unused funds can continue growing tax-free for retirement instead of facing taxes and penalties if withdrawn for non-educational purposes. 

529 Plans and Student Loan Repayment 

Another important recent change allows 529 funds to be used for student loan repayment. Account owners can withdraw up to $10,000 tax-free to pay down qualified education loans for the beneficiary. An additional $10,000 can be used for each of the beneficiary's siblings, providing flexibility for families with multiple children with student loan debt. 

Non-Parent Ownership and Financial Aid Impact 

Many grandparents, aunts, uncles, and family friends establish 529 plans for children they care about. A key question is how these non-parent-owned accounts affect financial aid eligibility. 

Prior to 2024, distributions from non-parent-owned 529 plans could significantly impact a student's financial aid eligibility. However, recent FAFSA simplification changes have eliminated this concern. Now, distributions from grandparent or other non-parent-owned 529 plans no longer need to be reported as student income on the FAFSA, making these accounts an even more attractive option for extended family members who want to help with education costs. 

529 Plans as Wealth Transfer Tools 

Beyond education funding, 529 plans can be remarkably efficient wealth transfer vehicles. They offer several advantages: 

1. Estate planning benefits: Contributions to 529 plans are considered completed gifts for federal tax purposes, removing those assets from your taxable estate while allowing you to maintain control of the account. 
2. Accelerated gifting: You can front-load up to five years of gift tax exclusions in a single year ($85,000 per beneficiary in 2024, or $170,000 for married couples) without using any of your lifetime gift tax exemption. 
3. Multi-generational planning: You can change beneficiaries to other family members, potentially allowing unused funds to benefit future generations for their education needs. 
4. State tax benefits: Many states offer income tax deductions or credits for 529 plan contributions, providing additional tax savings. 

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Strategic Considerations for 529 Plans 

When incorporating 529 plans into your overall financial strategy, consider: 

• Investment approach: Adjust your investment allocation based on the beneficiary's age and when funds will be needed. 
• Account ownership: Strategically decide who should own the account based on family dynamics and financial aid considerations. 
• Coordination with other benefits: Align your 529 strategy with other education tax benefits like the American Opportunity Credit or Lifetime Learning Credit. 

Building Your Education Funding Strategy 

At WHZ Strategic Wealth Advisors, we believe education funding should be part of a comprehensive financial plan. Our "Plan Well. Invest Well. Live Well." process helps families develop strategies that balance education savings with other important financial goals like retirement planning and wealth preservation. 

Whether you're a parent, grandparent, or other family member looking to help with education costs, a 529 plan might be an excellent tool to consider. For personalized guidance on how 529 plans fit into your overall financial picture, schedule a complimentary consultation with our team at whzwealth.com or call us at (860) 928-2341.  

Authored by Vice President, Associate Financial Advisor Holly C. Wanegar, CFP®. AI may have been used in the research and initial drafting of this piece. The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. WHZ Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.