529 College Savings Plan

What is a 529 college savings plan?

• A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for education expenses. You can withdraw funds tax-free to cover nearly any type of college expense. 529 plans may offer additional state or federal tax benefits.

• It can help finance a college education in a variety of important ways:
  • It enables you to save for education expenses.
  • You can make tax-free withdrawals to pay for eligible expenses.
  • It has a low minimum contribution amount.

• Every state except Wyoming offers a 529 college savings plan.

Benefits of a 529 college savings plan

• This type of investment account offers valuable tax benefits, and almost anyone—parents, grandparents or friends—may open a 529 plan and contribute money to the account. You can even open and contribute to a 529 plan for yourself.

• To open a 529, you must be a U.S. citizen or resident alien. You must have a Social Security or tax identification number. And you must have a permanent U.S. address that is not a post office box.

• Contributions made to a 529 plan are money on which you’ve already paid taxes, and investments in the account grow tax deferred. You can qualify for state income tax deductions in 35 states and the District of Columbia, and contributions are not subject to annual gift tax limits.

• Contribute up to $85,000 ($170,000 per married couple) per beneficiary in a single year without eating into your lifetime gift-tax exclusion. Once assets are in the account, they are generally considered to be out of the account owner's estate.

• States with 529 income tax deductions
  • Alabama
  • Arizona
  • Arkansas
  • Colorado
  • Connecticut
  • Georgia
  • Idaho
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Louisiana
  • Maryland
  • Massachusetts
  • Michigan
  • Minnesota
  • Mississippi
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • New York
  • North Dakota
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • Rhode Island
  • South Carolina
  • Utah
  • Vermont
  • Virginia
  • Washington, DC
  • West Virginia
  • Wisconsin

Eligible Expenses and Financial Aid Impact

• You can use the plan assets at any eligible school (one accredited for financial aid) around the country and abroad. That includes K-12, two- and four-year colleges, graduate schools (including law and medical), vocational and technical schools. It can be used to pay for many college expenses, including:
  • Tuition
  • Fees
  • Applicable room and board costs
  • Any supplies required by the school (e.g. computers)
  • Student loans repayments*
  • Apprenticeship programs**

• If your child doesn’t go to college, you can:
  • Name another eligible member of your family as a beneficiary (subject to plan rules)
  • Use the funds for your own qualified education expenses
  • Take a non-qualified withdrawal

• A non-qualified withdrawal subjects earnings to a 10% federal penalty and applicable federal, state and local income tax. Your assets in a 529 plan account can grow in perpetuity; there are generally no time or age limits on your use or distribution of plan assets.

• If a beneficiary receives a scholarship, 529 plan assets up to the amount of the scholarship can be returned to the account owner. While this is regarded as a non-qualified withdrawal, the 10% federal penalty will be waived in this instance. But earnings will be subject to any federal, state and local income tax. Alternatively, you can change the beneficiary to another eligible member of your family.

• A 529 plan has a relatively small impact on federal financial aid eligibility because 529 plan assets are considered assets of the account owner, rather than the beneficiary. When the parent is the account owner, 529 plan assets are factored into the expected family contribution rate, the same as any other parental asset. Learn more in BlackRock's Understanding College Aid brochure or consult with a financial professional.

SECURE ACT 2.0: Rollover to Roth IRA

• While the ability to rollover funds from your 529 plan to a Roth IRA can be beneficial in some cases, there are a few limitations.
  • Your 529 savings account must be open for over 15 years before funds can be rolled over into a Roth IRA.
  • If the 529 beneficiary is different from the 529 holder, the Roth IRA must be in the beneficiary’s name.
  • 529 contributions made within the preceding five years cannot be rolled over.
  • The lifetime maximum that can be rolled over is $35,000.
  • Rollovers are subject to Roth IRA annual contribution limits. IRA contribution limits for the 2023 tax year are $6,500 for people under 50, and $7,500 for people 50 and older.

References

• BlackRock
• SEC
• Fidelity
• Investopedia
• Vanguard