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How to Utilize a 529 Plan

How to Utilize a 529 Plan

  • What is a 529 plan?
    • A 529 Plan is a college savings fund meant to be utilized to pay for your children’s college tuition with a tax advantage for each child (beneficiary). 
  • Where can the money be spent from a 529 Plan?
    • Money from the 529 Plan can be used to cover the expenses of tuition, room and board, books, and school-related technology. If the money from the 529 is spent on anything other than qualified education expenses, you will have to pay both federal income taxes and a 10% penalty on the earnings.
  • What are the 529 plan tax advantages?
    • The earnings from all investments into the 529 are federal tax-free. One will not be taxed on withdrawals from the account, as long as it is for qualified education expenses. 
    • In the state of Ohio, one can deduct up to a maximum of $4,000 per beneficiary (child) per year.
    • Contributions to the 529 Plan in the last five years are ineligible for tax-free rollover. 
  • What does “rollover” of assets mean?
    • In December of 2022, the United States Senate Committee on Finance updated their Secure Act 2.0, allowing the rollover of assets to be transferred into a Roth IRA.
  • What are the rules and regulations on the eligibility of rollover?
  1. Need to own the 529 Plan for at least fifteen years.
  2. The beneficiary must be the owner of the Roth IRA and must have earned income at least equal to the amount of the rollover.
  3. The maximum amount allowed is $35,000 per lifetime to roll over into a Roth IRA.
    1. Tax-free
    2. Penalty free
  4. It’s important to adhere to the Roth contribution limit per year of $6,500. Translated, it would take six years to roll over the entire $35,000 lifetime limit.
  5. The funds can be transferred to another beneficiary or grandchild.
  6. The parent could pay off their own student loans.
    1. Allowed to use up to $10,000 of the 529 Plan for this purpose
  7. If the beneficiary earns a tax-free scholarship that covers the cost of qualified expenses, parents are then allowed to take the equal amount out of the 529 Plan without incurring the 10% federal tax penalty on the earnings portion (although you will pay income taxes on the earnings).
The content provided herein is based on an interpretation by Jim Hyre of the SECURE Act 2.0 and is not intended to be legal advice or provide a tax opinion. Please discuss these matters with the appropriate professional. This document is a summary only and not meant to represent all provisions within the SECURE Act 2.0.
This material is furnished to you as a courtesy and is for informational purposes only. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete; it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involve risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer's official statement. The official statement is available through your financial advisor and should be read carefully before investing. Before investing, it is important to consider whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.
 As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Tax implications can vary significantly from state to state.