What is the special rule for 529 plans?
What is the special rule for 529 plans? In this episode of Ask The Hammer, Jeffrey Levine answers the question.
Key Takeaways
- You can contribute up to $85,000 to a 529 plan in a single year and elect to spread it over exactly 5 years for gift tax purposes—you cannot customize the timeframe to fewer than 5 years.
- Contributions exceeding $85,000 require filing a gift tax return and use your $13 million lifetime exemption ($26 million for married couples in 2023), but distributions remain tax-free for qualified education expenses regardless of contribution amount.
- Starting in 2024, you can convert unused 529 funds to a Roth IRA if the account has been open for 15+ years, but strict rules apply: only earnings from the last 5 years are excluded, beneficiary must match account owner, and conversions are capped at $35,000 total.
- Take advantage of 'dynasty 529' accounts by changing beneficiaries to multiple related family members (children, grandchildren) over time, allowing a single large contribution to fund education for multiple generations.
- Gift tax lifetime exemptions are set to drop from $13 million to $6.5 million per person in 2026, so high-net-worth families should consider maximizing 529 contributions before the change takes effect.
What is the special rule for 529 plans? In this episode of Ask The Hammer, Jeffrey Levine from Buckingham Strategic Wealth answers the question: What is the special rule for 529 plans? 529 plans, also known as qualified tuition plans, are tax-advantaged savings plans designed to encourage saving for future education costs. They are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: college savings plans and prepaid tuition plans. While these plans have many rules and benefits, one notable special rule involves tax-free withdrawals for qualified education expenses.
Special Rule for Tax-Free Withdrawals:
The primary special rule for 529 plans is that the earnings in a 529 account grow federally tax-free, and withdrawals for qualified education expenses are also tax-free. This tax advantage makes 529 plans a powerful savings tool for educational expenses. Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They can also include room and board for students who are enrolled at least half-time.
Additional Special Rules and Features:
- K-12 Education Expenses: Recent changes to the tax law have expanded the use of 529 plans to include up to $10,000 per year per beneficiary for tuition at an elementary or secondary public, private, or religious school.
- Apprenticeship Programs: Withdrawals can also be used for fees, books, supplies, and equipment required for participation in certain apprenticeship programs.
- Student Loan Repayment: Another update allows for up to $10,000 (lifetime limit per beneficiary) to be used to repay the beneficiary’s student loans, and an additional $10,000 for each of the beneficiary’s siblings’ student loans.
- Rollovers to ABLE Accounts: Funds from a 529 account can be rolled over into an ABLE account without penalty, provided the ABLE account beneficiary is the same person as the 529 account beneficiary or a member of the 529 beneficiary's family. ABLE accounts are tax-advantaged savings accounts for individuals with disabilities.
These features enhance the flexibility and appeal of 529 plans for families saving for educational expenses. However, it's important to be aware of the rules specific to your plan, as there can be differences between states and between individual 529 plans. Always consider consulting with a financial advisor or tax professional to understand the benefits and implications of investing in a 529 plan fully.
Watch more episodes of Ask The Hammer at this link: https://www.finstream.tv/videos/ask-the-hammer/
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