What’s All This Talk About 529 Plans?

by Spero Financial

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A 529 Plan is an investment account specifically meant for saving for college. This account is exempt from federal taxes and allows beneficiaries to make tax-free withdrawals for specific purposes. This plan is designed to fund qualified education expenses such as tuition, room & board, books, and supplies.

Traditionally, there have been strict guidelines on the usage of funds. While many of those same guidelines are in place, there have been recent additions and expansions to them which opens up a bit more flexibility for contributors and beneficiaries.

In this article, we’ll go over a few basic pieces of information about the plan and highlight the most recent update that you need to know about if you currently have a 529 Plan or if you’re considering opening one in the future!

While there are many options, variations, and nitty gritty details when it comes to 529 Plans, essentially there are a few basics that make up the nature of the plan!

Traditionally, 529 Plans are used to pay for college, K-12 tuition, apprenticeships programs, and student loan payments. At their core, 529 Plans are investments accounts which work similarly to 401k or IRA accounts. 529 Plans offer tax-free growth and withdrawals for qualified education expenses.

These plans can be opened in one of two ways— direct-sold or advisor sold. While direct-sold plans offer lower fees, you are responsible for selecting the investments. Whereas advisor-sold plans are opened through a licensed financial advisor meaning you aren’t responsible to choose the investments.

While we’ve covered some plan basics, there are so many more details and caveats to 529 Plans! If you are considering opening a 529 Plan, it’s a good idea to look into the details about account opening, beneficiaries, contributions, investment portfolios, withdrawals, and more.

Current 529 Plan owners and those considering opening an account will be glad to know that the plan received some updates this year that make the account a bit more flexible!

As of January 1, 2024, the SECURE 2.0 Act went into effect— opening the options to roll unused funds into a Roth IRA without penalty. In the past, any funds not used for the qualified expenses would have incurred fees and taxes— which could be a 10% penalty AND income taxes.

A drawback of 529 Plans since their inception has always been their restrictive nature. Once a 529 is opened, the funds are essentially tied down to one usage— with any other usage of funds receiving hefty penalties. With this new update, plan contributors and plan beneficiaries can feel a bit more at ease regarding the usage of the funds in the case that they are not needed for education expenses.

While there was a bit of flexibility in transferring plans to alternate beneficiaries, this update allows plan owners to roll over funds into a beneficiary’s retirement account— saving for college and retirement at the same time. This update removes hesitations regarding account funding in the case that the named beneficiary does not pursue higher education or run into any qualified education expenses.

As with everything, there are rules and caveats to rolling over funds to a retirement account! There are lifetime limits, yearly contribution limits, plan ownership rules, and eligibility requirements. Be sure to look into each of these aspects before considering rolling over funds and before opening a 529 Plan!

If you’re considering a opening a 529 account or any other college savings plan, Pinnacle Wealth Management is a great resource to help guide you through the process! Their advisors are equipped to help you discover the best fit for your needs and goals. To discover more about college savings options and what that may look like for you, contact a Pinnacle Wealth Management advisor today!

For more information on 529 Plans and the recent updates.

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