It’s 529 Day: 3 Things You Didn’t Know About 529 Plans

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Think you know everything there is to know about 529 plans? Read on for some surprising features. 

If the idea of paying for college seems daunting, it’s because the cost of higher education has soared over the past number of years. For the 2022-2023 academic year, the average cost of college tuition and fees, according to U.S. News and World Report was:

$10,423 for in-state tuition$22,953 for out-of-state tuition$39,723 for private tuition

As such, if you’re worried about paying for college, it could make sense to open a 529 plan. These plans offer the benefit of tax-free investment gains, provided your money is used for qualifying educational expenses.

But while 529 plans have been around for a while, the rules surrounding them have changed through the years. Here are some things you may not know about 529 plans.

1. Some states give you a tax break on your contributions

There’s no federal tax break on the money you put into a 529 plan. Rather, if you contribute $5,000 one year, that’s still $5,000 of income the IRS will tax you on.

However, more than 30 states offer some type of state income tax deduction or tax credit for 529 plan contributions. Now in most cases, you’ll have to fund a 529 plan from your home state to get that tax benefit, but that’s not always the case. It pays to see what options are available to you based on where you live.

2. You can roll a 529 plan into a Roth IRA

The purpose of a 529 plan is to help parents avoid taxes on investment gains in the course of saving to pay for education. And the good thing about these plans is that you’re allowed to change beneficiaries to avoid being penalized for using your money for non-education purposes.

But come 2024, you’ll get even more flexibility with your 529. That’s because starting then, you’ll have the option to roll unused 529 funds into a Roth IRA without facing a penalty. You’ll just need to be aware that there’s a lifetime cap on this option per beneficiary — $35,000.

It’s worth noting that this is a very positive development, because changing beneficiaries on a 529 plan could still leave you with excess funds. And when that’s the case, non-educational withdrawals are subject to a 10% penalty on the gains portion of the account.

3. You can use them to pay for K-12 education

For many years, 529 plans could only be used to pay for higher education. But as part of the 2017 Tax Cuts and Jobs Act, 529 plans were expanded to cover K-12 tuition at private schools, too.

Now if you withdraw too much of your money to pay for K-12 education, you might run into a shortfall by the time your kids are ready to go to college. But it’s good to know that the option exists.

The more you know about 529s and how they work, the easier it will be to determine if one of these plans is right for you. So in honor of 529 Day, take the time to read up on these plans and educate yourself on their different rules and benefits.

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