New 529 Planning Ideas

Key changes from Secure Act 2.0 are now in effect. Before we dive in, let’s take a brief look at the history of saving for education through 529 plans.

529’s were established by congress in 1996 but not every state offered a plan early on. In 2001 congress updated 529 plans so that qualified withdrawals wouldn’t be taxed. Main qualified withdrawals include tuition, room and board, books, computers/ equipment. There are other expenses that are considered qualified as well.

Keep in mind that trade schools and other programs offered by accredited colleges and universities apply. So, go for that Yoga certification at your local community college.

Now every state offers a plan including the District of Columbia. Not all states offer income tax deductions and states like Ohio, for example, enable out-of-state plans to qualify for an income tax deduction for contributions.

Contributions to 529s are governed by gift tax rules. So, generally the maximum contribution is the annual gift tax exclusion ($19k per person per beneficiary in 2025 – $38k for a married couple filing jointly). That said, there is the ability to “superfund” a 529 which, in 2025, would enable a $95k contribution assuming no other gifts to that beneficiary within 5 years.

Historically, the downside for 529 plans was possibly over-saving and the taxes and penalties associated with taking money out for non-qualified expenses. That all began to change in 2017 under the Tax Cut and Jobs Act that allowed for qualified withdrawals of up to $10k/year for private school grades K-12; however, only tuition is qualified.

In December of 2022 congress signed Secure Act 2.0. This created new opportunities for 529 planning and what happens to unused funds.

This brings us to the new planning topic: 529 plan assets can now be rolled over into a Roth IRA tax-free in the name of the beneficiary, not the owner. There are some key rules, however:

The 529 must have been open for 15 years. There is still some question if the 15 year clock re-starts if naming a new beneficiary of the 529. At this point, we would suggest being conservative with interpretation (i.e. assume 15 year per beneficiary).
Funds eligible for rollover must’ve been in the 529 for 5 years. Again, it’s unclear if transfers between 529s re-start the 5-year window. At this point, we would suggest being conservative with interpretation (i.e. assume transfers restart the 5 year clock).
$35k lifetime limit on rollovers, and rollovers can only equal the maximum IRA contribution ($7k in 2025). So it’ll take a few years of rollovers.
Annual IRA limits apply meaning that you cannot rollover $7k and also contribute $7k to the Roth IRA.

So, what does this mean for you? Well, if you are the owner/beneficiary of a 529 that meets the first two rules, then consider rollover of the 529 as it is not subject to the income limits of traditional Roth IRA contributions.

If you have young children and are looking at establishing 529s, we now recommend starting accounts in all the beneficiary names to begin the 15-year clock. If, at a later point, the IRS provides clarity and the 15-year clock doesn’t restart upon naming a new beneficiary, then you could revisit consolidation of accounts.

As always, please reach out if you have questions or would like to create or modify a college funding plan.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors. Before investing in any state’s 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.