Exciting 529 Plan Rule Changes: What’s New for 2024

New rules for 529 college savings plans have gone into effect for 2024, providing even greater advantages for families looking to save for college in a tax-advantaged manner. Previously, concerns about potential penalties for non-qualified withdrawals may have deterred some from fully embracing 529 plans. However, recent rule changes have transformed this concern into a significant advantage.

One of the major updates allows for the transfer of unused funds to a Roth IRA account in the beneficiary’s name. This means that even if your child decides not to go to college or receives scholarships that reduce the need for the 529 funds, you can still utilize these savings in a highly beneficial way.

New 529 Rules for 2024

Funding higher education can be burdensome, but a few new rules in 2024 will make it easier for students and student loan holders.

1. 529-to-Roth IRA Rollover

One of the reasons parents and others may have hesitated to contribute to a 529 plan in the past is the limitation on how those funds could be used. Funds could only be withdrawn for qualified expenses related to education, and any non-qualified withdrawals were subject to normal income tax plus a 10% federal tax penalty.

But what if your child decided not to go to college, or they received scholarships or other financial aid and didn’t require all the funds in your 529 account?

The recent rule change has had a big impact. It allows 529 plan beneficiaries to transfer unused funds without a penalty or paying taxes.

2. Secure 2.0 Act

Under the Secure 2.0 Act, the IRS tax code allows tax and penalty-free 529-to-Roth IRA rollovers starting in 2024, provided certain conditions are met. The conditions include:

– Beneficiaries are allowed to roll over up to $35,000 over their lifetime into a Roth IRA in their name (not the original 529 account holder’s name).

3. Gift Tax Increase

In 2024, the gift tax limit has been raised from $17,000 in 2023 to $18,000. Because contributions to a 529 plan are considered gifts, individuals can contribute up to $18,000 per year to a beneficiary’s 529 account without filing a gift tax return. Married couples filing jointly can contribute up to $36,000.

Other Recent 529 Plan Updates

Tax and regulation changes and interpretations are consistently updated for improved understanding and implementation. 529 plan updates are no exception, so here are some of the more recent updates that impact 529 plan holders and those thinking about opening a 529 savings plan.

Qualified Education Expenses

Qualified education expenses include those that you can pay for out of a 529 savings account. These are primarily educational expenses, but that definition has been broadened over the years.

Student Loan Repayments

The SECURE Act of 2019 allows beneficiaries of 529 savings plans to pay for student loans up to $10,000 over their lifetime. Since 529 plan funds don’t expire, distributions can be used to pay for student loan repayments for beneficiaries or their siblings.

Apprenticeship Programs Funding

Qualified apprenticeship programs and their associated expenses are considered educational expenses and can be paid for with 529 plan distributions.

529 Plans Can Be Used For K-12 Education

In 2017, a tax reform package expanded the benefits of 529 plan qualified expenses, including private school expenses for K-12 education programs. These qualified expenses are limited to $10,000, but they can be used to help pay for elementary, middle, and high school programs.

Transferring 529 Plan Funds to an ABLE Account

The same 2017 reforms allow funds transfers from a 529 plan to a qualified 529 ABLE Account, created by the 2014 Achieving a Better Life Experience (ABLE) Act. Americans with disabilities can save money for college and other expenses in a tax-deferred ABLE account to supplement private insurance and public benefits.

Maximize the Benefits of New 529 Rules and Roth IRA Rollover

So, how should you and your family take advantage of these recent changes? Here are some ways to benefit from the plan updates in 2024. Work with a plan advisor, financial advisor, or tax professional in your state to maximize your financial and state tax benefits.

– Enroll in a 529 plan.

– Gift up to $18,000 annually to your child or grandchild, or more if you take advantage of superfunding.

– Pay directly to your grandchild’s institution tax-free and lower your taxable estate.

– Pay down student loans with your 529 plan funds.

– Use 529 plan funds for your child’s K-12 education or apprenticeship.

– Transfer unused 529 funds to a Roth IRA retirement plan.

New Benefit: Student Loan Payment Retirement Account Matching

If you’ve completed college and are still paying down your student loans, you have a new option for retirement savings. Many people are still in student loan debt, so they defer beginning to save for retirement and have missed out on employee match programs.

Starting in 2024, Section 110 of the SECURE 2.0 Act helps employees with student debt to save for retirement by allowing employers to make matching contributions to their retirement plans, provided they make qualified student loan payments.

This applies to 401(k), 403(b), SIMPLE IRA, and section 457(b) plans. Talk to your employer about this option to help you start saving for retirement while still paying off student loans.

Work with Rubin Wealth Advisors

Understanding and maximizing the benefits of these new 529 plan rules and Roth IRA rollovers can be complex. It’s important to work with the advisors at Rubin Wealth Advisors to help you navigate these changes and make the most of your financial opportunities. Our team is here to ensure you and your family can fully benefit from these updates, secure your financial future, and achieve your educational and retirement goals.