The federal general spending package made important changes to 529 plans so that the monetary resources you contribute can be better used
The 529 plan, which is an investment account earmarked for college expenses, had major changes passed in the past year. The most representative is one that allows unused funds to go to a retirement account; but it is not the only one, so now you will be able to save more money that would benefit your children or anyone who wants to continue with their higher education.
An opportunity to transfer up to $35,000 tax-free from 529 tuition savings plans into Roth individual retirement accounts beginning in 2024 was established as part of the $1.7 trillion federal overhead package passed late last year. .
This change is especially important because, with the current rules, money left over in a 529 plan stays until it is used for qualified education expenses, or it could be withdrawn, but you must pay a 10% penalty and federal tax. on income on profit. Now it won’t be necessary.
This rule especially applies to two types of qualified 520 tuition plans or programs: the prepaid plan and the savings plan, which is another benefit of this adjustment.
Although each US state offers both types of 529 plans, they can differ slightly from state to state. In either case, they allow you to change the beneficiaries of the plan to another family member if the money is not used.
Prepaid plans for 529 accounts are those that allow you to pay in advance and secure tuition at the current rates of eligible public or private universities, without covering expenses such as room and board. In many cases, they require you to reside in the state when you apply and limit enrollment to a certain time period each year, which varies by state. Many of these accounts also have age or grade limits for beneficiaries.
For their part, savings plans do not require state residence, so you can save in the plan of any state throughout the country. Some states allow you to deduct your contributions from your state income tax (or get a state tax credit), which could make your local plan the best financial option for you.
In savings plans you can also choose your investments, earnings will grow tax-deferred, and withdrawals are tax-free when used for qualified educational expenses like tuition and fees for K-12 (up to $10,000 per year per beneficiary), college , graduate school and trade school; books and subjects; technology costs; and even student loan payments.
Likewise, the super-financing option (Superfunding) is maintained. Superfunding a 529 plan involves contributing several years’ worth of gift tax exclusion amount to a 529 plan, filing a gift tax return using Form 709, and averaging the gifts over five years.
Contributions that count toward your annual gift tax exclusion are up to $17,000 in 2023, meaning you can superfund your plan up to $85,000, which is five years’ worth of contributions.
This type of option is used primarily by seniors and high net worth individuals, because you transfer money into a tax-deferred account, which can then be used tax-free for qualified educational expenses, and also reduce the value of your estate. This is useful if you are subject to federal estate tax or if your state has a state estate tax.
We recommend you approach a financial adviser to see if it is convenient for you to superfund your 529 plan.