Section 529 plans are designed to encourage investing for education expenses. Beyond their favorable tax treatment, Section 529 plans are a versatile education planning tool offering families a way to invest for a child's future education expenses (more detailed information on qualified withdrawals can be found in the Education Funding Brochure and the Education Planning Comparison Fact Sheet, links available below).
Benefits of Section 529 plans
- Withdrawals, including any earnings, are federal (and possibly state and/or local) income tax-free as long as the funds are used for qualified higher education expenses1 .
- Contributions up to the annual gift tax exclusion amount without incurring a federal gift tax (currently $18,000 for individuals and $36,000 for married couples electing to split gifts)2
- Five years' worth of annual exclusion gifts can be contributed in one year and prorated over five years (currently $90,000 for individuals and $180,000 for married couples electing to split gifts), as long as no additional contributions or other gifts are made during the five-year period2
- Control over account assets and the ability to change beneficiaries to another family member at any time without tax consequences3
Did you know?
Starting in January 2024, SECURE 2.0 will allow funds from an established 529 account to be transferred tax-free to a Roth IRA for the same beneficiary. This will allow educational funds to serve as a starting point for a beneficiary's Roth IRA savings. There are certain limitations:
- The 529 account has to have been open for at least 15 years.
- The beneficiary of both the 529 account and the Roth IRA must be same person.
The amount of the rollover will be limited:
- Annual rollovers will be subject to yearly IRA contribution limits, minus any other IRA contributions that have already been made.
- There will be a lifetime aggregate rollover limit of $35,000 per beneficiary.
- Rollovers may not include contributions (or earnings) made in the last 5 years.
- The IRS has not yet provided further guidance regarding these changes, and it is unclear when more guidance will come.
Consider a Section 529 plan
We'll work with you to understand your family's education needs, including the type of school your child will attend and how much you're able to save, to design a strategy that can help keep your savings goals on track.
Things to consider:
- Will your children attend public or private school, participate in an apprenticeship, or pursue an advanced degree?
- What are the tax advantages to using certain types of accounts to save for a child's or grandchild's education?
- How can you help pay the education expenses of your grandchildren while reducing your own taxes?
- What Expenses Can a 529 Education Savings Account Cover?
- Tips to Teach Your College Kids How to Manage Their Money
- Could a 529 Education Savings Plan Affect Financial Aid?
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Before your client invests in a Section 529 plan, they should be provided the plan’s official statement and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the 529 plan, which they should carefully consider before investing. They should also consider whether their home state or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds and protection from creditors that are only available for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency.
Merrill, its affiliates, and financial advisors, do not provide legal, tax or accounting advice. Your client should consult their legal and/or tax advisors before making any financial decisions.
1 To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a section 529 account, such withdrawal must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. The beneficiary must be attending an eligible educational institution at least half time for room and board to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs. Some foreign institutions are eligible. You can also take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an elementary or secondary public, private or religious school. Qualified higher education expenses now include expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the designated beneficiary or sibling of the designated beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the designated beneficiary will count towards the lifetime limit of the sibling, not the designated beneficiary. Such repayments may impact student loan interest deductibility. State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school, apprenticeship expenses, and payment of qualified education loans.
2 Contributions during 2024 between $18,000 and $90,000 ($36,000 and $180,000 for married couples electing to split gifts) made in one year can be prorated over a five-year period without subjecting you to gift tax or reducing your federal unified estate and gift tax credit. If you contribute less than the $90,000 ($180,000 for married couples electing to split gifts) maximum, additional contributions can be made during the five-year period without you being subject to federal gift tax, up to a prorated level of $18,000 ($36,000 for married couples electing to split gifts) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. For contributions between $18,000 and $90,000 ($36,000 and $180,000 for married couples electing to split gifts) made in one year, if the account owner dies before the end of the five-year period, a prorated portion of the contribution may be included in their estate for estate tax purposes.
3 Participants/account owners are generally permitted to change the beneficiary to another member of the family (as defined in the Internal Revenue Code) without triggering federal income and additional taxes.