New Flexibility for 529 Plans

A 529 plan is a tax-advantaged education savings account designed to help families save for future education costs. It can be used for college, certain K–12 expenses, apprenticeship programs, credentialing programs, and other qualified education expenses.

Through changes in recent legislation, they have also seen additional benefits that were not available when they were first introduced.

Existing Key Benefits

• Tax-free growth: Investment earnings grow tax-deferred and may be withdrawn free of federal income tax when used for qualified education expenses.
• Potential state tax benefits: Many states offer a state income tax deduction or credit for contributions, depending on the plan and the contributor’s state of residence.
• Broad qualified expenses: Funds can generally be used for tuition, fees, books, supplies, equipment, certain technology costs, and room and board for eligible students.
• Beneficiary flexibility: If the original beneficiary does not need the funds, the account owner can typically change the beneficiary to another eligible family member.
• Estate and gift planning advantages: Contributions may qualify for annual gift tax exclusion treatment, and larger front-loaded contributions may be possible through a five-year election.

New Key Benefits

• K–12 and career-path flexibility: 529 funds may also be used for certain K–12 expenses, registered apprenticeships, and qualified postsecondary credentialing programs.
• Student loan repayment option: Currently, up to $10,000 may be used to repay qualified student loans for the beneficiary or eligible family members.
• Roth IRA rollover flexibility: Under certain legislation, unused 529 funds may be rolled over to a Roth IRA for the beneficiary, subject to lifetime and annual limits. This is the biggest change as funds can now benefit the beneficiary even after all education expenses have been paid. Some key aspects of this change include:
  • Up to $35,000 can be rolled from a 529 to a Roth IRA.
  • These rollovers are considered contributions, so the annual contribution limit does apply (this means it will take several years to reach the $35,000 lifetime limit).
  • The beneficiary must have earned income at least equal to the rollover amount for that year.
  • The 529 plan must be open for at least 15 years under the beneficiary prior to rollovers being eligible; changing the beneficiary can restart the 15-year timeframe.

Important Considerations

• Nonqualified withdrawals may be costly: Earnings on withdrawals not used for qualified expenses may be subject to income tax and a penalty.
• Rules vary by state: State tax treatment, deductions, credits, and recapture rules differ, so it is important to review the applicable state plan rules.
• Investment risk applies: 529 plans are investment accounts, so balances can rise or fall based on market performance.
• Coordination matters: Families should coordinate 529 withdrawals with education tax credits, scholarships, and financial aid planning.

The Bottom Line

For families planning for education costs, a 529 plan can be a powerful savings tool because it combines tax advantages, flexible qualified uses, and the ability to redirect unused funds in certain situations. The right approach depends on the family’s education goals, tax situation, state rules, and investment time horizon.

Apella Capital, LLC (“Apella”), DBA Apella Wealth, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Apella Wealth provides this communication as a matter of general information. Any data or statistics quoted are from sources believed to be reliable but cannot be guaranteed or warranted.