Updates on 529 Plans
As most of you know 529 plans for education savings have been around for a long time now. We wanted to take the opportunity to update you on several changes that have happened over the last few years. As a refresher, a 529 plan is funded with after tax dollars, but grows tax free if withdrawals are used for qualifying education expenses such as tuition and room and board. Some but not all states give a state income tax deduction for 529 contributions. In the past, 529 accounts could only be used toward higher education expenses such as undergraduate and graduate school.
Updates:
- Up to $10,000 per year can now be used toward private elementary or secondary school tuition expenses. Note that the only qualified expense in this rule is tuition. Another caveat is that not all states are compliant with this rule. So, check to make sure your state allows these types of withdrawals. Otherwise, they could be subject to taxes and penalties.
- A lifetime maximum of $10,000 can be used to pay student debt. Both private and federal student loans are eligible. Again, check to see if your state has changed their rules to comply with this new provision as not all have to date.
- One new option that has gotten a lot of press lately is that as of this year 529 plans allow for transfers to Roth IRAs. This should help alleviate some but not all the concern with overfunding 529 plans. There are several conditions that must be satisfied for this new rule. Some of the conditions need further clarification from the IRS. The conditions include:
- The Roth IRA must be in the name of the 529 plan beneficiary.
- The 529 plan must have been maintained for 15 years or longer.
- Any contributions to the 529 plan within the last 5 years and the earnings on those contributions are not eligible to be moved to a Roth IRA.
- The annual limit for how much can be moved to the Roth IRA is subject to the annual IRA contribution limit for the year. The current year limit is $7,000 with a $1,000 catch up for those 50 and older. Any regular contributions to a traditional IRA or Roth IRA would reduce the amount that could be moved to a Roth IRA for the year.
- The lifetime maximum that can be moved from a 529 to a Roth IRA is $35,000.
As you can see the options for using 529 plans continue to grow and may still expand in the future. If you have any questions, please reach out to us to discuss further.
