Recent Updates to 529 Plans
As college costs have climbed steadily, helping our children get through college without saddling them with a pile of debt remains a challenge for many families in Massachusetts. Financial experts (and I am not a financial professional) tend to agree that incurring a lot of debt for undergraduate studies is best avoided. As part of my divorce and family law practice, I’m regularly working with parents that have 529 Plans. This article is not financial advice, but general information about some of the more recent developments regarding these plans.
One tool for college savings is the 529 Plan. A 529 Plan (named after the corresponding section of the Internal Revenue Code) provides for a tax-advantaged way to save for a child’s education. Historically the plans were focused on college, but the regulations have been expanded to include K-12 expenses. Funds in a 529 plan grow (hopefully) tax-deferred until it is withdrawn. So long as the money is used for qualified educational expenses as defined by the IRS, withdrawals are not subject to either state or federal taxes. Some states may even provide tax deductions on contributions.
Over the last handful of years, federal tax laws changed to add several new tax benefits for 529 Plans, and their application has expanded. While 529 plans reference part of the federal tax code, the plans are administered by individual states and the District of Columbia. Two main types of 529 Plans exist, educational savings plans and prepaid tuition plans. For more info specific to Massachusetts, check out MEFA, the Massachusetts Educational Financing Authority (Student Loans and Guidance on Ways to Pay for College – MEFA).
Not Just for College Anymore
The Tax Cuts and Jobs Act (TCJA) of 2017 (the same act that changed the tax treatment of alimony payments) expanded 529s to cover education expenses from Kindergarten to 12th grade. Parents can make tax-free withdrawals from a 529 account to pay for tuition at K-12 schools, but withdrawals are capped at $10,000.00 per year. If you withdraw more, the amount is taxable. There are no limits to withdrawals for college, well, other than your account balance of course. Different states have limits on how large your 529 account balance can grow, but the limits are pretty generous. Acceptable expenses include not just tuition, but required fees, room and board, and textbooks. Red solo cups, video game consoles, and Starbucks gift cards are not eligible expenses.
What About Student Loans?
The SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement = SECURE) is related mainly to retirement issues. It is also somewhat of a goofy and really long name for a piece of legislation in my opinion. Anyway, the SECURE Act also made some changes to the 529 Rules. Assets from a 529 – if you have any left after your kids finish their educations – may now be used to pay some student loan debt for the account beneficiary (the student) or their siblings. There is a lifetime maximum of $10,000.00 per individual. Given college costs, 10k of loans is not that much of a benefit, but it is something.
Trades and Apprenticeships
A career in the trades can be lucrative and doesn’t come with the giant cost of college or graduate school. 529 Plans, also as of 2019, can be used for expenses including fees, books, supplies, and equipment necessary to participate in an apprenticeship program, but the program must be registered and certified by the US Secretary of Labor.
Hooray for Grandparents!
In 2021, the FAFSA Simplification Act (as usual, where was this when I was filling this thing out for my kids?) changed the rule so that when a grandparent uses funds in a 529 Plan (established by the grandparent), starting with the 2024-25 FAFSA, students will no longer be required to report cash gifts from a grandparent or contributions from a grandparent-owned 529 savings plan. In the past, this would have a significant impact on the child’s financial aid eligibility. This new rule is being called the “grandparent loophole.”
529 to Roth IRA Rollovers
Jumping around a bit to the olden days of 2022, the SECURE 2.0 Act allows another use for excess 529 Funds. After having two kids recently complete their book-learnin’ years, the concept of “extra” 529 plan funds is not something I am personally familiar with. Starting this year (2024), up to $35,000 in excess 529 funds may be transferred to a Roth IRA in the name of the 529 account’s beneficiary. Alas, the 529 account must have been open for at least 15 years, and the transfer(s) must adhere to Roth IRA contribution limits.
As with many things financial, working with a qualified financial planner to review your own circumstances and developing strategies for college along with your own financial goals is always a good idea. Try to do this well-before your student is headed off to their prom or getting their driver’s license. Depending on your household income, some financial planners may suggest you save more for your own retirement and forgo contributions to 529 Plans as retirement assets are not counted against your expected family contributions.