529 College Savings Plan – Options for Unused Balances

Qualified tuition plans, more commonly known as “529 accounts,” are tax-advantaged savings accounts designed to help families save for future education expenses. These accounts are named after Section 529 of the Internal Revenue Code and are sponsored by states, state agencies, or educational institutions.  529 plans come in two forms: prepaid tuition plans and college savings plans.

One major benefit of a 529 account is the tax advantages they offer. While contributions to these accounts are not federally tax deductible, any earnings are tax free assuming the funds are used to fund qualified educational expenses.  Additionally, some states offer tax deductions or credits for contributions to 529 accounts.

One issue that some 529 account owners face is what to do with money that is left over in a 529 account after the beneficiary has completed their education. Traditionally, there were two options:

• Withdraw the funds for non-qualified expenses. However, the earnings portion of the withdrawal would be subject to income tax and a 10% penalty.
• Change the beneficiary to another eligible family member, such as a sibling, a cousin, a parent, or even a grandchild.  (Note that gift tax and generation skipping rules may apply. More on that in a future post). 

Thanks to the SECURE Act of 2019 and the SECURE Act 2.0 of 2022, 529 account owners and their beneficiaries now have additional options for unused funds: 

• The SECURE Act “1.0” expanded the definition of qualified educational expenses to include up to $10,000 per year in qualified student loan repayments.  
• Starting in 2024, the SECURE Act 2.0 enables account owners to transfer funds from a 529 plan to a Roth IRA for the benefit of the 529 plan beneficiary.  This option is subject to several restrictions, including an annual rollover limit equal to the annual contribution limit ($7,000 in 2024), an eligible compensation requirement, and a lifetime limit of $35,000. In addition, the 529 account must have a lifespan of at least 15 years and contributions made in the prior 5 years are not eligible.

These important changes enhance the usefulness of 529 accounts, making them a powerful savings tool for not only education, but also retirement and legacy planning.

Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.

Jackie Goldstick, CFP® is the Principal and Director of Financial Planning at Core Wealth Management. She is a member of the National Association of Personal Financial Advisors (NAPFA).

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