Today, many parents and grandparents recognize the significant advantages of 529 college savings plans for funding children’s or grandchildren’s education. No wonder: It’s a savvy financial move that can potentially save you money in taxes and help soothe some of the anxiety about how to pay for college.
With nearly three decades of experience as a practicing CERTIFIED FINANCIAL PLANNER® professional, I’ve assisted many parents in establishing 529 plans for their children. In fact, I started 529 plans for my own kids almost 20 years ago. Even now, with my youngest still attending college out of state, the tax-free growth within their 529 accounts has allowed me to efficiently manage savings while teaching my children valuable lessons about investing and planning.
Here I address five common questions parents have about maximizing 529 plan benefits, covering topics such as transitioning to another state’s plan, how to protect your 529 savings if something happens to you, and what to do if there is money left in your plan after graduation. These insights reflect the most recent rules changes.
Question #1: I currently have a 529 plan for my child, but I’m considering transferring to another state’s plan. How can I make this switch?
There are many reasons that might prompt you to consider transferring your 529 plan from one state to another. Personally, I made the switch years ago, transferring my children’s plans to another state in pursuit of lower management fees and better online savings tools. Another common reason for changing 529 plans is when parents relocate to another state and wish to capitalize on its tax incentives.
Should you opt for a plan switch, you’ll execute what’s known as a rollover to move assets from one state’s 529 plan to another. There are key IRS regulations to consider:
- Rollovers are limited to once every 12 months for the same beneficiary.
- Funds can be rolled over to another 529 plan at any time for a different beneficiary, provided they are a family member (refer to plan definitions for eligible beneficiaries).
- Ideally, direct rollovers between plans without receiving a check are preferable. However, if you do receive a check, you must deposit the funds into another 529 within 60 calendar days to avoid tax consequences.
- Note that some states impose penalties for outbound rollovers (transferring your plan from their state to another). These states include Alabama, Arkansas, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Rhode Island, Utah, Virginia, Washington DC, and Wisconsin.
When I transitioned my children’s 529 plans, I opened new accounts with the new plan and completed the requisite form authorizing the transfer existing assets. The new plan administrator facilitated the process seamlessly, and the funds transferred into the new accounts, sparing me from additional paperwork and phone calls.
Helpful tip: When switching plans, request the new plan administrator to conduct a direct rollover to avoid tax complications. Remember, rollovers are limited to once every 12 months. Compelling reasons to switch plans can include relocation, lower fees, or access to unique investment options not available in your current plan.
Question #2: Can 529 plan funds be used for international study programs?
Many colleges and universities offer study-abroad programs, providing fantastic opportunities for students to expand their horizons while earning college credit. Whether it’s a semester in Australia, Europe, or elsewhere, immersing oneself in a different culture can help foster confidence, self-awareness, and cultural appreciation.
Fortunately, your 529 plan can facilitate such enriching experiences, whether Down Under or anywhere else your student’s studies may lead. Many higher education institutions outside the United States accept 529 funds for tuition, fees, books, supplies, and other qualified educational expenses without tax penalties. Your student can utilize these funds for study abroad if:
- The program abroad is eligible for credit at their U.S. educational institution, and
- Their college or university is recognized under the Department of Education guidelines.
Helpful tip: There’s an easy way to determine which foreign colleges and universities are eligible. Visit the U.S. Department of Education’s federal student aid website, navigate to the Federal School Code List, and sort by country. There are nearly 400 foreign universities on the list, including one where I studied in Paris years ago.
Question #3: How can I superfund my annual gifting?
You may be aware that contributions to a 529 plan come with estate and gift tax advantages. When you invest in a 529 plan, the funds are considered gifts, effectively reducing your taxable estate. Individuals, including parents, grandparents, or anyone else can gift up to $18,000 per person (in 2024) without triggering gift tax reporting requirements. Furthermore, this $18,000 contribution limit doesn’t eat into your lifetime exemption amount.
But here’s where it gets even better: You can maximize the impact of your gift to a 529 plan through a technique known as “superfunding.” This allows you to contribute up to five years’ worth of gifts without incurring gift tax. While the contribution is made in a single year, it’s spread out over five years for tax purposes. This means that in 2024, you could contribute $18,000 five times (totaling $90,000) in one go. If you’re married, your spouse can also contribute an additional $90,000, resulting in a combined contribution of $180,000 per beneficiary. (To take advantage of this, use IRS Form 709 to elect treatment of the entire gift as a series of five equal annual gifts).
Helpful tip: This strategy is particularly advantageous if you’ve recently sold a business, received an inheritance, or experienced another significant cash windfall, as it allows you to swiftly allocate five years’ worth of funding into a 529 plan. It’s equally beneficial for grandparents aiming to create an educational legacy for future generations. Notably, you don’t have to be the account owner of the 529 plan to make such a gift. Gifts to 529 plan accounts hold extra power due to their tax-efficient nature.
Question #4: What happens to my 529 account if something happens to me?
College 529 plans are structured with one owner and one beneficiary at any given time. Typically, the account owner, often a parent or grandparent, assumes responsibility for all major decisions, including designating the beneficiary, selecting investment strategies, and initiating withdrawals. Meanwhile, the beneficiary, typically the student, utilizes the funds for educational expenses but lacks control over the account.
In the event of the account owner’s death or incapacitation, the plan’s terms dictate the succession process for a new account owner. Most plans afford the account owner the opportunity to appoint a successor. Many plans even permit the naming of primary and secondary successors to assume control in the event of the original owner’s demise, disability, or voluntary resignation.
Failure to designate a successor prompts the specific rules of the college savings plan to determine the plan’s fate upon the account owner’s death or incapacity. Some states confer ownership to the designated beneficiary upon the owner’s death, with special provisions for minor beneficiaries. Conversely, in other jurisdictions, the 529 account enters probate and is distributed in accordance with the owner’s will or the state’s intestacy laws if no will exists.
For instance, Utah’s 529 plan, among the most widely used options, stipulates that ownership transfers to the successor owner upon the original owner’s death. In the absence of a named successor, ownership passes to the beneficiary, with guardians assuming control if the beneficiary is a minor. In the event of the owner’s incapacitation, an attorney can step in to manage the account with a valid durable power of attorney (POA).
Helpful tip: To help protect your 529 plan, you should name a successor account owner if the plan permits. Also, check with your attorney or advisor to make sure your durable POA addresses who can manage your 529 plan in the event of your incapacity.
Question #5: What if there is money left in our 529 plan?
Having leftover funds in your 529 plan is not a bad problem to have — it’s far preferable to facing a shortfall. An estimated 10% of families end up with money left in their 529 plan.
Here are several strategies for utilizing these funds:
- Transfer the funds to another family member’s plan: You can transfer the funds to another family member’s plan, which could be a sibling, niece, nephew, future grandchild, or even yourself. Your plan documents will outline the eligible family members.
- Leave the money for future educational needs: Leaving the money in the plan is an option, especially if it might be needed for graduate school or another eligible professional program. For instance, one of our clients has significant funds remaining in the California ScholarShare 529 plan. While his son is currently in the military and hasn’t required the funds, the California plan allows for indefinite use, enabling the funds to continue growing tax-free.
- Tax-free withdrawal for student loans: The recently passed SECURE Act introduced a provision allowing tax-free withdrawal of up to $10,000 per beneficiary to pay down qualified student loans. An additional $10,000 is available for a sibling. However, it’s advisable to consult with your financial or tax advisor beforehand, as state tax implications may vary.
- Withdrawal for non-qualified expenses: Although withdrawals for non-qualified expenses incur taxes on earnings and a 10% penalty, beneficiaries in lower tax brackets may face minimal tax consequences. Seek guidance from your tax advisor before making such withdrawals. Note that the 10% penalty is waived under certain circumstances, such as the beneficiary’s death or disability, or if they receive a scholarship.
- Rollover into a Roth IRA: Since Jan. 1, 2024, 529 plan owners can make tax- and penalty-free rollovers into a Roth IRA owned by the plan’s beneficiary. There are limitations, including the annual allowable contribution to the Roth IRA ($7,000 in 2024 for those under 50) and a lifetime limit of $35,000 per beneficiary. Additionally, the 529 plan must have been active for the beneficiary for at least 15 years.
Helpful tip: This last option presents an opportunity to not only fund education but also establish a strong financial footing for retirement planning or other significant financial goals. For instance, penalty-free withdrawals from a Roth IRA can be used for a first home down payment, though withdrawals are taxable if the Roth IRA is less than five years old.
529 plans offer remarkable versatility and flexibility, allowing saved funds to continue growing until they’re needed. Consult with your advisor to explore how a 529 plan can help pave the way for your children’s and family members’ success.
