Recent Changes for College Savings Plans—What Families Should Know
August 17, 2023
Many families recognize higher education as an important investment which opens doors to future income and opportunities for their children. Even if you’re able to afford your children’s college tuition outright, incorporating college funding strategies into your financial plan is a wise decision that helps you reduce your tax burden and plan for your family’s financial future.
529 plans are one of the most popular tax-advantaged college savings plans available. In this article, Haley LaRue, CFP®, Boulay Wealth Manager, shares what you should know about 529 plans, as well as the recent changes and considerations that may affect your family’s college savings strategy.
529 Plan Basics
A 529 plan is a tax-advantaged savings plan originally designed to encourage saving for future higher educational expenses. However, 529 uses have been expanded to cover up to $10,000 of a student’s secondary school education (whether public or private) as well as cover a lifetime limit of up to $10,000 in student loan payments.
529 plans offer a variety of tax benefits, including tax-deferred growth and tax-free withdrawals when used to pay for qualified education expenses. While contributions to these plans are not Federally tax-deductible, some states offer a deduction or subtraction on the contributions. If 529 funds are not used for qualified education expenses, there is a 10 percent penalty and tax on the growth. However, these plans are very flexible in that you can change the beneficiary of a 529 plan at any time, and the funds can be used for any qualified education expense, not just tuition. This makes 529 plans a great way to save for college for multiple children or grandchildren, as well as a valuable way to pass your wealth on to the next generation.
529 Plan Changes and Considerations
Beyond 529 plan basics, families should keep in mind several recent changes and other factors that could affect their college savings strategy:
-
-
- New rules for grandparents. Under the new college savings plan rules for grandparents, grandparent-owned 529 plans will no longer impact a student’s eligibility to receive needs-based financial aid. This is a notable change, as previously, students reported any funding from a grandparent-owned 529 plan as untaxed student income on their FAFSA and contributions from grandparents would count against the student’s financial aid eligibility. The new rules go into effect for the 2023-2024 school year.
- 529 to Roth rollover. The new ability for a portion of college savings plan dollars to transfer into a Roth IRA is a provision of the SECURE Act 2.0, which was passed in December 2020. The provision allows beneficiaries of 529 plans to roll over up to $35,000 of their 529 plan funds into a Roth IRA without paying taxes or penalties. This is a significant change, as previously, 529 plan funds could only be used to pay for qualified education expenses without incurring taxes or penalties. The 529 to Roth IRA rollover can be a good option for beneficiaries who have more money saved for college than they need.
-
There are several eligibility requirements to keep in mind for the 529 to Roth rollover. First, the 529 plan must have been open for at least 15 years. Second, the beneficiary of the 529 plan must be the owner of the Roth IRA. Third, the Roth IRA owner must have earned income at least equal to the amount of the rollover (rollover not to exceed the annual Roth contribution limit each year). Finally, contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for the rollover.
- K-PhD expenses. Families should also be aware of the rising cost of K-PhD expenses—the total costs of education from kindergarten through a doctoral degree. The cost of college has been rising steadily in recent years, and this trend is likely to continue. Families who are planning to save for their children’s K-PhD education should start saving early and consider all of their options. 529 plans are a great place to start building up these funds in a tax-efficient manner. An experienced wealth management advisor can assist with your K-PhD financial planning.
- Tax deductions in Minnesota. Families who live in Minnesota should be aware of the tax credit/subtraction for contributions to any state’s section 529 college savings plan or prepaid tuition plan. This is available to all Minnesota residents, depending on their income, on up to $3,000 in 529 plan contributions each year. Once claimed, the credit/subtraction will be applied to your Minnesota taxable income, reducing your tax liability. Keep in mind, the deduction is only available for contributions made to a 529 plan that is administered by a state, not those administered by the Federal government.
If you have questions on any of the 529 plan considerations or changes mentioned above, consult with your Boulay wealth management advisor. They can help you see how these factors fit into your family’s overall financial picture.
Helping You Get There…
Choosing the right 529 plan and college savings strategy for your family can be a complex decision. It is important to work with a trusted wealth management advisor who can help you understand your options and develop a plan that meets your specific needs.
Boulay’s wealth management advisors understand the importance of strategizing for future generations’ financial and educational futures, and we’re dedicated to helping you get there with a financial plan that maximizes your savings. Connect with a member of the Boulay Financial Advisors, LLC team today to learn more.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
More Recent Stories
Input your search keywords and press Enter.