What is a 529 Plan?
A 529 plan, named after Section 529 of the federal tax code, is an excellent tool for saving for education and allowing investments to grow tax-free. The funds must be used for qualified education expenses to guarantee tax-free growth.
What are the tax benefits and implications of a 529 Plan?
529 plans offer significant tax advantages, allowing families to accumulate wealth for education while avoiding income tax on the plan’s growth. Contributions to a 529 plan are considered gifts, and in 2025, you can gift up to $19,000 per beneficiary per year without incurring gift tax. Contributions beyond this threshold may require reporting and could trigger tax consequences. Please note that the IRS may adjust these limits for future tax years.
Total contribution limits for 529 plans typically range from $300,000 to $500,000, depending on the state sponsoring the plan. These limits may be updated in 2025, so staying informed is essential.
Regardless of residency, you can select any state’s 529 plan. However, some states, like Illinois, provide additional tax incentives for residents. In Illinois, for instance, married couples filing jointly can subtract up to $20,000 of their contribution from their state-taxable income.
What are “qualified education expenses”?
Qualified expenses include tuition, fees, books, and room and board, provided the student is enrolled at an eligible educational institution. 529 plan funds can even be used for computers if they’re required for schooling.
Can I use a 529 Plan for private elementary or high school tuition?
Since 2018, 529 plan funds can be used to pay for private elementary and high school tuition. You can withdraw up to $10,000 annually, though specific rules exist around such withdrawals. It’s recommended to consult with a tax advisor before proceeding.
What are the rules for Roths with 529 Plans?
One of the most significant updates related to 529 plans, which took effect in 2024 under the SECURE Act 2.0, is the ability to roll over up to $35,000 from a 529 plan into a Roth IRA for the beneficiary. This offers added flexibility for families who might overfund a 529 plan, as they can now move the unused funds into a retirement account without penalties or taxes. Some restrictions include the account needing to be at least 15 years old, and rollovers are subject to annual Roth IRA contribution limits.
Who can get a 529 Plan?
Anyone can set up a 529 plan, as there are no income limitations. The beneficiary can be a child, grandchild, relative, friend, or yourself. Eligible educational institutions typically include universities, colleges, and vocational schools. You can check the Department of Education’s accreditation website to confirm eligibility.
DHJJ Financial Advisors: Your Partner in Financial and Educational Planning
DHJJ Financial Advisors specializes in helping clients navigate individual tax and financial planning matters, including maximizing the benefits of 529 plans. Our team can assist you in understanding these plans’ tax implications and opportunities, ensuring that your financial strategy aligns with your education and long-term savings goals.
