Using the 529 Plan to Save For a Child’s Education and Retirement

Great news for anyone trying to save for a child’s education. The new 529 plan rule makes it easier to save for your child’s education and their retirement.

A 529 plan is an investment account that delivers significant tax benefits when used to pay for a designated beneficiary’s qualified education expense. Under previous legislation, a 529 plan could be used to pay for qualifying expenses, such as:

  • College
  • K-12 tuition
  • Apprenticeship programs

A 529 account could even be used for loan repayments. However, recently legislation enacted under the Secure 2.0 Act has made the 529 account even more attractive for taxpayers.

What to Know About the Secure 2.0 Act
While the 529 account is a proven savings tool, it did have a potential downside for investors. Previously, if you contributed to a 529 Plan and your child never went to college, or you had leftover funds after paying for their education expenses, withdrawals from the account would trigger a 10% penalty and require you to pay income taxes on it. The new policy eliminates this potential downside for parents and others who use 529s to save money for college and other types of qualified education expenses. Legislation in the Secure 2.0 Act allows beneficiaries of a Sec. 529 college savings account to choose direct trustee-to-trustee rollovers to a Roth IRA without tax or penalty.

Of course, new legislation brings with it important details to know when saving with a 529 account. Some key considerations include:

  • The Sec. 529 account must have existed for more than 15 years at the time of the rollover
  • Aggregate rollovers cannot exceed $35,000
  • Rollovers are also subject to the Roth IRA annual contribution limits

Finally, it’s important to know that the change is effective for distributions made after Dec. 31, 2023.

Yes, you’ll have to wait until 2024 to make any 529 rollovers, but knowing the rollover option exists will likely make investing in a 529 plan even more appealing to some people. Additionally, recognizing that leftover savings in the 529 plan can be used to fund their retirement may also incentivize students to be more frugal about where they decide to go to college.