A 529 Plan Can Help Fund a Child’s College Education — and Retirement
State-sponsored 529 college savings plans are a tax-savvy way to pay for future education expenses that can easily reach six figures. In recent years, 529s have undergone changes that provide even more reasons to like them.
What Is a 529 College Savings Plan?
A 529 plan is an education savings account with tax benefits. Money invested in a 529 plan grows tax-deferred, and withdrawals aren’t federally taxed — and are generally state tax-free — if the money is used for tuition and other qualified expenses. Plus, you don’t have to invest in your state’s 529 plan, although many states offer a tax deduction to residents contributing to an in-state 529 plan.
How To Estimate the Cost of College
This calculator can help1 you determine how much to save for college. Even if you can’t save the full amount, what you do save can help offset the expense of higher education. You might consider the one-third rule when approaching college savings: Plan on one-third of the cost coming from savings; one-third from grants, scholarships, and current income while the child is in college; and the remaining one-third from loans.
Rolling Unused 529 Funds Into a Roth IRA
Using the 529 plan savings for non-educational purposes triggers income taxes and a penalty on the investment earnings. You could avoid the penalties and taxes by switching the beneficiary on the 529 account to another family member who is headed to school.
With the passage of SECURE 2.0, you have more options for tax- and penalty-free withdrawals. For example, you can use up to $10,000 in leftover funds to repay your child’s student loans, and as of 2024, you can roll up to $35,000 in unspent funds into a Roth IRA for your child,2 with no federal tax implications.
Some restrictions apply to Roth IRA roll-ins:
- The 529 account must have been open for at least 15 years.
- You can’t roll over any contributions or earnings made within the past five years.
- You can’t roll over more than the annual Roth IRA contribution limit in one year.
- The child must have earned income that’s at least equal to the amount being rolled over that year.
Even if you don’t use 529 plan savings to fund a child’s college education, you can still help save for your child’s future.
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2 Contributions: If you contribute to a Roth IRA, you can make tax-free withdrawals if you’ve owned a Roth IRA for at least five years (as defined by the IRS) and meet the requirements for a “qualifying event”: age 59 1/2, a “first-time” home purchase, a disability, or death (with withdrawals going to your beneficiaries). Otherwise, you may have to pay income taxes and penalties to withdraw your earnings. Withdrawals: Roth IRA contributions can be withdrawn at any time without taxes or penalties. If you have a traditional IRA, you may not be able to withdraw your money before age 59 1/2 without paying a penalty. There can be many exceptions to the IRS rules, so carefully research all of your options.
MissionSquare does not offer specific tax, insurance, or legal advice. The information presented here is for educational purposes only and is not to be construed or relied upon as investment advice. It is recommended that individuals consult with their personal finance advisor prior to implementing any financial or tax strategy.