With education costs ballooning, qualified education accounts such as 529s have become a mainstay for parents. These special accounts help families save for a child’s college, K-12 tuition, apprenticeship, and trade school expenses whilst benefiting from tax-free growth.

Thanks to changes made by Congress, 529 plans have even more uses—and ones you might want to know about, regardless of where you are in your parenting journey. The SECURE 2.0 Act made a number of changes to 529s which might change how you decide to plan for your family’s financial future.

What is a 529?

A 529 plan is a type of tax-advantaged account which can be used to save for education expenses. You can open a 529 for the benefit of anybody—that includes yourself, your child, or another relative. Then, contributions made to that 529 can grow tax-free. The proceeds from the account must be used on qualifying expenses such as tuition, fees, room and board, books and supplies, and computers.

Because of their versatility and tax benefits, 529s are a natural first-stop for new parents to invest in their child’s future. Due to changes made in 2023, 529s gained a number of new benefits which might make this privileged account more attractive to parents.

What are the New 529 Account Rules?

At the end of 2022, Congress passed the SECURE 2.0 Act, which made changes to retirement plans and provisions affecting qualifying accounts. The bill contained a number of changes which made 529 plans more flexible for families:

• Tax-free rollovers to Roth IRAs: Arguably the most compelling change to 529 accounts is the ability to roll over unused 529 plan funds to a Roth IRA tax-free and penalty-free. This option means that unused 529 funds can find new legs in a beneficiary’s retirement account.
• Qualified education expenses now include K-12 tuition and apprenticeship expenses: SECURE 2.0 expanded the horizons of what qualified education expenses cover, which means 529 plans can now be used to pay for K-12 tuition and fees, as well as apprenticeship expenses.
• Extended age limit for contributions: Grandparents and other relatives now have even more time to save for their grandchildren’s education thanks to a change to the age limit on contributions. Now, people up to 75-years-old can make contributions to a 529 (up from 70.)
• Increased student loan repayment assistance: 529 plan funds can now be used to pay down student debt. Up to $10,000 can be used per beneficiary to pay down student debt.

What’s the new 529-to-Roth IRA conversion rule?

The new 529 account rules include an option to rollover unused plan funds to a Roth IRA tax-free. Though this won’t mean much for young parents, saving for their kiddo’s expenses way down the line, it offers a new level of flexibility for more mature parents.

This new option means that unused 529 funds can be rolled over into a retirement account without taxes or penalties for the beneficiary. A rollover might help a child, or adult 529 beneficiary, get a headstart on retirement.

Although, there are some limitations you should be aware of:

• Annual Roth IRA contribution limits apply to rollovers. Big 529 savers probably won’t be able to roll over the entire value of a 529 to your beneficiary all at once. Instead, the contributions will probably have to take place over a number of years. In 2023, Roth IRA contributions are limited to $6,500 for individuals under age 50 (and $7,500 for people aged 50 and older.)
• The beneficiary must have earned income. In order to do a rollover, the account’s beneficiary must have earned income equal to the amount of the rollover. That means that if you want to roll over $6,500 into the Roth IRA, the beneficiary must have at least $6,500 in earned income in the year to do so.
• There is a $35,000 lifetime rollover limit. A lifetime rollover limit means that 529-to-Roth IRA conversions cannot exceed $35,000 per beneficiary in their entire lifetime. This means it’s probably not a wise idea to open a 529 just to stack your retirement savings.
• The plan must be open for at least 15 years. The new 529 rules are deliberately targeted to help families which have excess 529 funds (and no natural landing spot.) As a result, plans cannot be rolled over until after a plan has been open for at least 15 years.

Is A 529 Right For My Family?

529 plans offer families the ability to save for an education over a long period of time, appreciating the growth of markets. At the same time, 529s have an explicit purpose: to pay for an education. Though recent changes have made 529s more flexible, families might find greater flexibility with a custodial account.

Custodial accounts are, as the name suggests, accounts which are managed by a custodian for the benefit of a minor child. You can use custodial accounts to pay for more than education, something we elaborate on at length in our custodial accounts vs. 529 articles, we explain at length about the merit of both account types.

It’s also super easy to set up a custodial account with EarlyBird and start saving for your child’s financial future. Build your child’s custodial account while they’re young and let them decide what to do with it, or use the custodial account to pay down parental expenses in the future.

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