529 Savings Plans Aren’t Just for College Anymore

By Christopher Sassone, CFP^®, CLTC^®, Financial Consultant & Investment Advisor

Many parents dream of watching their kids walk across the stage in a cap and gown and collect their hard-earned college diploma so they can have the best chance at a high-paying career. But traditional four-year universities aren’t for everyone, and more employers are beginning to value experience over academic achievement. So how can you save for your child’s education, while leaving room for flexibility in determining their own future? 529 savings plans now offer more options than ever to accommodate a variety of situations.

529 Plan Basics

A 529 plan is a tax-advantaged savings plan that’s designed to pay for education. Originally, it was limited to only postsecondary education. But recent changes have broadened the scope to include K-12 education, apprenticeship programs, student loan repayments and even Roth IRA contributions.

How It Works

There are two types of 529 plans – savings plans and prepaid tuition plans. Prepaid tuition plans are not offered by all states and may have restrictions on which colleges they can be used for. The money paid into a prepaid tuition plan also isn’t guaranteed by the government.

However, 529 savings plans, which are more common, are usually established by parents or grandparents on behalf of a child or grandchild. Money grows on a tax-deferred basis until it’s withdrawn. As long as the money is used according to IRS guidelines, the withdrawals aren’t subject to either state or federal taxes, and you may even benefit from a tax deduction in some states. Withdrawals from 529 savings plans can be used for college, graduate school and K-12 qualified expenses, including tuition, fees, room and board and other related costs. For K-12 expenses, tax-free withdrawals are limited to $10,000 per year. For qualified student loan repayments, distributions are limited to a $10,000 lifetime cap.

When College Isn’t Part of the Journey

Funds that are invested in 529 plans can now be used for apprenticeships and vocational schools. If a four-year degree isn’t what your child dreams of, your investment can still support their education by using those funds for an apprenticeship program for on-the-job training in a variety of fields, such as accounting, cosmetology, pharmacy, mechanics, engineering and more.

Transfers and Leftover Funds

What happens if you need to change beneficiaries? Or you don’t need all the funds for education? You can transfer funds to another family member, such as another child, sibling, parent, in-law, spouse or a cousin. This is especially important if your original beneficiary decides not to attend college, or if they receive a scholarship and don’t require the funds. You have the option to transfer the funds to another relative to be used for their education.

Under new changes in the SECURE 2.0 Act effective January 1, 2024, if the plan is at least 15 years old, up to a $35,000 lifetime maximum can now be rolled over into a Roth IRA. This is great news for those who have funds left over, but who still want to contribute financially to their beneficiary’s future. 529 plans offer a lot of benefits, but there are also a lot of considerations to weigh to determine what’s right for your unique situation. Contact us for a consultation to see if this savings strategy could work for you.