The end of a year and the beginning of a new year can cause many Americans to focus on the future -- and not just on their own future. It's a time when some look to what's ahead for their families.
With soaring costs, planning ahead for college is an especially smart move. Thinking about saving for your kids' or grandkids' college in a 529 plan? There's a big new perk in 2024 that you'll definitely want to know about.
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Why 529 plans are so popular
Before we get to that new perk, it's important to understand why 529 plans are so popular. These plans are specifically designed for saving for education expenses. Initially, 529 plans could only be used to cover the costs of college and higher education. Since 2018, though, they can also be used to pay for up to $10,000 in private elementary and high school tuition.
The best thing about 529 plans is that they're tax-advantaged. You can't deduct contributions to a 529 plan from your federal income taxes. However, all of the money earned in a 529 plan grows tax-free (at least for federal taxes). Many states also offer tax deductions or credits for contributions.
A beneficiary must be named for each 529 plan. However, the account owner controls the money. It's also no problem to roll the funds into another 529 plan. This is great for cases when one child decides against attending college. Any money in that child's 529 plan can be used to fund another child's education.
One downside to 529 plans, though, is that there's a limit on how much you can contribute. In 2024, that limit is set at $18,000. There are also maximum aggregate contribution limits that vary by state.
Now they're even better
But another previous drawback to 529 plans is being eased significantly in 2024. In the past, the accounts could only be used for education-related purposes. The federal government imposed a 10% penalty on any withdrawals that were used for other reasons.
Now, however, unused money from 529 plans can be used for retirement by rolling the funds over to a Roth IRA. This is a major change that makes 529 plans better than ever. The new rule was made possible by the passage of the Secure 2.0 legislation in late 2022.
Granted, there are some restrictions. For one thing, the 529 account must have been open for at least 15 years. No contributions made in the last five years can be rolled over. You'll still be subject to annual Roth IRA contribution limits as well. There's also a $35,000 lifetime cap on 529-to-Roth-IRA rollovers.
Since 529 plans were created in 1996, one of the biggest concerns for parents and grandparents was: What happens if the child doesn't attend college or receives a scholarship that covers their college expenses? That's no longer as big of a worry.
