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My Favorite 529 Account Features

| May 27, 2024

In honor of College Savings Day on May 29th, I figured it would be a good time to visit 5 of my favorite features of 529 savings plans. It’s never too early to get started saving for a child or grandchild’s education costs and 529 accounts offer a lot of benefits to help you along the way. Let’s dive in.

Flexibility and Control

A unique feature of 529 accounts is that while they are set up for the benefit of a beneficiary (usually a child or grandchild), the account owner (usually a parent or grandparent) remains in complete control. The account owner can change the beneficiary whenever they’d like as long as the new beneficiary is a “member of the family” of the current beneficiary. An example would be a parent who has two children. The parent sets up a 529 account for their oldest child who chooses not to attend college. The parent can switch the beneficiary on the account to the younger child and not lose any of the tax advantages of the account. Also, unlike some other types of accounts that require the funds be used before the beneficiary reaches a certain age, 529 accounts have no such age limitation.

Tax-Free Growth When Used for Education

One of the most compelling features of 529 accounts is that while contributions are made on an after-tax basis, the growth (or earnings) in the account is potentially tax free if used for qualified educational expenses. What qualifies as “educational expenses” is pretty generous, but you do need to pay attention to ensure your withdrawal meets the criteria. If you make a nonqualified withdrawal (i.e. you make a withdrawal for something other than educational expenses), then you will owe taxes on the earnings and face a penalty. This has been a main concern of parents about saving into a 529 plan, however, recent legislation has given more options about how the money can be used and still be considered a qualified educational expense.

Potential State Tax Benefits for Contributions

While contributions are made on an after-tax basis and receive no upfront tax benefit at the federal level, residents of some states may receive benefits on their state taxes. In order to potentially receive a tax benefit, your state may require that you invest in their in-state 529 plan or they may allow you to invest in another state’s 529 plan while still being able to claim a state tax benefit. A qualified financial professional can help you navigate your state’s rules and whether it makes sense to invest in your in-state 529 plan or potentially invest in another state’s 529 plan.

Not Just for College or University

Aside from colleges and universities, 529 accounts can generally be used for vocational and trade schools and more recently, certain apprenticeship programs. They also potentially can be used for tuition at private elementary or secondary school (up to $10,000 per year). The expansion to allow 529 accounts to be used to pay tuition at the K-12 level is fairly recent and it’s important to note that while this a recognized benefit at the federal level, not all states allow for 529 accounts to be used for this purpose. If this is something you’re considering, be sure to discuss with a qualified financial or tax professional to ensure you don’t run afoul of federal or state rules.

Potential to Roll Over into a Roth IRA

As I mentioned earlier, one of the biggest concerns I hear from parents about 529 plans is what will happen if their child doesn’t ultimately need the money for qualified educational expenses. The worst case scenario is you make a nonqualified withdrawal and pay taxes and a penalty on the earnings. However, starting this year, there is now the potential to roll over a portion of a 529 account to a Roth IRA owned by the beneficiary of the 529 account. There are several rules that must be followed in order to rollover properly and maintain the tax advantages, so work with a qualified financial professional who can help you navigate.  

A 529 account is just one of a few ways to save for education costs. As we enter graduation season, now is a great time to consider starting to invest for your child or grandchild’s future education costs.

Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.

LPL Financial and Croxall Capital Planning do not provide tax or legal advice. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.