How a 529 Plan Works
Whether you are dreaming of sending your child off to college or pursuing higher education yourself, financial planning is essential to help make those dreams a reality! One valuable tool that can pave the way for educational aspirations is the 529 plan.
A 529 plan is a tax advantage savings plan designed to help pay for education expenses. Originally limited to post-secondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019. After the SECURE Act of 2019 AND SECURE 2.0 of 2022, 529s can also be used to pay off student loans and fund a Roth IRA. 1
529 Plans provide a great deal of flexibility in terms of ownership. Parents, grandparents, extended family members and even friends can establish and contribute to an account on behalf of a designated beneficiary.
Funds put into a 529 plan will grow on a tax deferred basis until it’s withdrawn. Notably, when these funds are utilized for expenses that meet the IRS criteria for qualified education, the withdrawals remain exempt for both state and federal taxes. Any other withdrawals are subject to taxes plus a 10% penalty, with exceptions to certain circumstances, such as death or disability.1
The two main types of 529 plans are Education savings plans and prepaid tuition plans.
Education Savings plans tend to be the more common type, where the account holder contributes money to the plan and that money is invested in a pre-set selection of investment options. The SECURE ACT of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship programs expense and up to $10,000 in student loan debt payment for both account beneficiaries and their siblings. And the SECURE Act of 2022, passed as part of the 2023 Omnibus funding bill, will permit rolling over up to $35,000 of unspent funds in a 529 account into a Roth IRA account, starting on Jan. 1, 2024. To qualify, the account must be at least 15 years old. 1
A select few states and certain higher education institutions provide prepaid tuition plans, each with its own unique features. However, the overarching concept remains consistent: these plans enable you to secure present day tuition rates for a student who might not commence college until several years later. It’s important to note that prepaid plans are not applicable to k-12 education.
Overall, a 529 plan stands as a powerful tool for anyone with aspirations for higher education. Whether you’re a parent planning for your child’s future, an adult seeking to further your education or relative who wants to contribute to a loved one’s growth, a 529 plan offers a range of benefits that can help make your dream a reality!
- 529 Plan: What It Is, How It Works, Pros and Cons, Investopedia, 2023
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ABOUT SGROI FINANCIAL
Sgroi Financial is a full service, independent financial planning firm proudly serving the Western New York area since 1971. We offer services that will help you achieve your financial goals including retirement planning, investment management, estate planning, college planning and insurance. We help individuals, families, retirees, working adults, young adults and business owners.