3 Things to Know About New IRS Rules for 529 Savings Plans
The 529 Savings Plan has always been a great tax-advantaged college savings vehicle, but the new IRS rules regarding 529 savings plans have added even more benefits that go beyond college and might even help you with retirement! We are here to break it all down for you!
The best part? These tax changes are a win-win for parents and families who are committed to smart saving. Simply put, they make 529 plans an even more flexible, more attractive investment vehicle for parents looking to set aside money for a wide range of postsecondary educational paths.
The new rules also make it easier for parents to wrap their arms around ambitious long-term goals and work steadily over time to reach them.
For simple, easy-to-understand explanations, we turned to Mari Adam, a Certified Financial Planner and owner of Mari Talks Money, LLC, in Boca Raton. “Thanks to these changes, 529 plans are going from really, really good to pretty amazing,” she said. “What they’re adding is more flexibility and more tax savings.”
Here are 3 major changes Adam wants parents to be aware of:
- 529 plan uses are expanding. If you’re the parent of a child who isn’t taking the traditional route of a four-year college or university after high school graduation, no problem! Your 529 plan can now be used to pay for certain apprenticeship programs, professional certifications and job training in a variety of fields, including the culinary arts, aviation and financial services. Adam recommends consulting the U.S. Department of Labor’s apprenticeship database to determine if your child’s area of interest has a qualified program.
- Grandparent-owned 529s no longer factor into financial aid eligibility. When it comes to paying for college, every little bit helps, and most parents want to maximize their student’s shot at federal financial aid. Under this new rule, the balances of grandparent-owned 529 plans won’t be included on the Free Application for Federal Student Aid, or FAFSA. (Not familiar with this form? Don’t worry. If your child is headed to college, you will be soon.)
- IRS allowing 529-to-Roth rollovers. Parents with unused college savings in a 529 account can transfer that money to a beneficiary’s Roth IRA (individual retirement account). Adam said the lifetime maximum a parent can transfer is $35,000 per beneficiary. The change takes effect in January 2024, and the account must have been open for 15 years (with rollover funds in the account for at least 5 years). Any rollover is also subject to current Roth IRA contribution limits. Adam said this change will alleviate the concerns of those parents who were worried about overfunding a 529 account because they were unsure of their student’s post-high school plans.
“This is one of the most important legacies you can give your children, your family,” Adam said. “Even if you’re just contributing a little bit of money in the beginning, it’s going to help you because every dollar you save is a dollar you don’t have to borrow.”
The changes come as the Florida 529 Savings Plan is more popular than ever before. In the past five years, the number of accounts has almost doubled—surging from 66,000 in 2017 to more than 130,000 in 2023.
Adam often reminds parents that there’s virtually no downside to opening one of these accounts.
“I’ve been doing this for 35 years, and there is no reason not to make a 529 plan your plan of choice,” she said. “They have amazing tax benefits that you don’t have in retirement accounts or in a cash savings account.”
The latest research shows that opening a 529 plan can set a family up for success. Fidelity’s 2022 College Savings Indicator found that:
- Parents using a 529 plan have a median of $12,000 set aside for college versus a median of $10,000 for those without a 529 plan.
- Parents with 529 plans are on track to cover 37 percent of their college saving goals versus those without a 529 on track to cover only 22 percent of their goals.
For parents who want to get started, Adam’s best advice is to do just that. “The best time to open an account like this is yesterday,” she said. “The second-best time to open one is today!”
Plus, all accounts opened between May 1 – June 30, 2023, will get an extra $50 in their account to get them started.
Have more questions? We have answers! Explore our Frequently Asked Questions to learn more about these plans!