Question 1

What are the tax advantages of a 529 plan?

Accepted Answer

Per IRC § 529, 529 plan contributions are not deductible on federal taxes (unlike 401(k)). However: (1) Earnings grow tax-deferred — no federal tax on dividends, interest, or capital gains inside the account. (2) Qualified withdrawals are federally tax-free. (3) Many states offer a state income tax deduction for contributions (34 states plus DC as of 2024 — amounts vary: $2,500-$10,000/year; some states have no deduction cap). The compounding benefit is substantial: $200/month contributed for 18 years at 7% annual return = ~$87,000, of which ~$43,000 is tax-free earnings — all available tax-free for college costs.

Question 2

What are qualified education expenses for 529 withdrawals?

Accepted Answer

Per IRC § 529(e)(3) and IRS Publication 970, qualified expenses include: tuition and fees, required books and supplies, room and board (for students enrolled at least half-time), computers and technology required for enrollment, special needs services. Since 2019 (SECURE Act): K-12 tuition up to $10,000/year per beneficiary from federal standpoint (some states have not conformed — check your state). Since 2024 (SECURE Act 2.0): apprenticeship programs and up to $10,000 lifetime for student loan repayment. NOT qualified: transportation, sports and recreation costs, health insurance, college application fees.

Question 3

Are there limits on 529 contributions?

Accepted Answer

No annual federal contribution limit exists for 529 plans (unlike IRAs). However: (1) Contributions are considered completed gifts for gift tax purposes — the annual gift tax exclusion is $18,000 per donor per beneficiary in 2024 (IRC § 2503(b)). (2) Superfunding (5-year gift tax averaging): you can contribute up to $90,000 per beneficiary in one year and elect to treat it as made ratably over 5 years, using 5 years of annual exclusions at once (IRC § 529(c)(2)). (3) State plan contribution limits: each plan has an aggregate maximum (typically $300,000-$550,000 per beneficiary — this is a plan balance cap, not an annual cap).

Question 4

What happens to unused 529 funds?

Accepted Answer

Options for unused 529 funds: (1) Change the beneficiary to another family member (sibling, cousin, even yourself — no tax consequences if done properly per IRC § 529(c)(3)(C)). (2) Keep the account open — the funds keep growing tax-deferred indefinitely; useful if the beneficiary pursues graduate school later. (3) Roth IRA rollover (SECURE Act 2.0, effective 2024): roll up to $35,000 lifetime per beneficiary into the beneficiary's Roth IRA, subject to annual IRA contribution limits — requires the account to be at least 15 years old. (4) Non-qualified withdrawal: principal is returned tax-free; earnings are subject to income tax plus 10% penalty. Exceptions to the 10% penalty: death, disability, scholarship received (penalty-free up to scholarship amount).

Question 5

How do I compare 529 plans across states?

Accepted Answer

You are not required to use your state's 529 plan — you can open any state's plan for any school in any state. Key comparison factors: (1) Investment options and fees — low-cost index funds vs actively managed; expense ratios matter significantly over 18 years. (2) State tax deduction — if your state offers a deduction only for contributions to your state's plan, calculate whether the deduction value outweighs a better out-of-state plan's investment options. (3) Some states offer deductions for any state's plan (Arizona, Kansas, Maine, Missouri, Montana, Pennsylvania). (4) Morningstar publishes annual 529 ratings. SavingForCollege.com aggregates fees and investment options.

Question 6

What is the Roth IRA rollover option from SECURE Act 2.0?

Accepted Answer

SECURE Act 2.0 (Pub. L. 117-328, effective January 1, 2024) allows tax-free, penalty-free rollovers from a 529 account to the beneficiary's Roth IRA. Key rules: (1) The 529 account must have been open for at least 15 years. (2) Lifetime rollover limit: $35,000 per beneficiary. (3) Annual rollover limited to Roth IRA contribution limits for the year ($7,000 in 2024, plus catch-up if 50+). (4) Beneficiary must have earned income at least equal to the rollover amount. This is a significant planning opportunity: families that oversaved in 529s or received scholarships can now convert unused funds to retirement savings without penalty.

Question 7

How does the 529 interact with FAFSA financial aid calculations?

Accepted Answer

Parent-owned 529 plans are reported as a parent asset on FAFSA — assessed at maximum 5.64% of value annually (vs student assets at 20%). So a $50,000 529 owned by a parent reduces aid eligibility by at most $2,820/year — a relatively small penalty for the tax benefits. Student-owned 529s (rare — student as account owner) are also assessed at the parent rate under current rules if the student is a dependent. Per the FAFSA Simplification Act (effective 2024-25), 529 distributions are no longer counted as student income — eliminating the previous timing constraint on grandparent-owned 529 distributions.

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