When it comes to saving for your child's education, 529 plans are a popular choice due to their tax advantages and flexibility. However, there are several lesser-known aspects of 529 plans that can enhance your saving strategy. Here are five things you might not know about 529 plans:

1. You aren’t limited to the 529 provided in your home state.

There are numerous plans available nationwide. You can compare them based on factors such as maximum contribution limits, fees, and available tax benefits. Identify your priorities and select a plan that best meets those criteria.

2. You can change beneficiaries or shift funds pretty easily.

529 plans are more flexible than you might think when it comes to beneficiaries. You can change the beneficiary to another family member without incurring taxes or penalties. This feature is particularly useful if one child decides not to attend college, allowing you to use the funds for another child's education. Additionally, you can roll over funds from one 529 plan to another beneficiary’s 529 plan once every 12 months without penalties.

3. Qualified education expenses are broader than you think.

Funds from 529 plans can be used for a wide range of educational expenses beyond just tuition. Qualified expenses include room and board, textbooks, computers, and even internet access required for schooling. This flexibility ensures that more of your education costs can be covered using the tax-advantaged savings in your 529 plan.

4. The impact on financial aid is minimal.

Many parents worry about how a 529 plan will affect their child's eligibility for financial aid. While 529 plans are considered parental assets and do impact financial aid calculations, the impact is relatively minor. Typically, only up to 5.64% of the value of a 529 plan is counted towards the expected family contribution (EFC) on the FAFSA. This is much lower than the assessment rate for student-owned assets, which can be as high as 20%.

5. You have flexibility with unused funds.

If your child doesn't use all the funds in their 529 plan, you have several options. As mentioned, you can change the beneficiary to another family member or use the funds for graduate school. Most notably, beginning in 2024, you can also roll over unused 529 plan funds to a Roth IRA for the same beneficiary. This rollover allows you up to $35,000 of 529 plan funds to a Roth IRA over the beneficiary’s lifetime, providing a significant opportunity for tax-advantaged retirement savings.

Understanding these lesser-known aspects of 529 plans can help you make the most of your savings strategy for educational expenses. From state tax benefits and flexible use of funds to minimal impact on financial aid, 529 plans offer a variety of features that can be tailored to your family's needs.

Sources

U.S. Securities and Exchange Commission. (2023, August 31). Updated Investor Bulletin: 10 Questions to Consider Before Opening a 529 Account. SEC. Retrieved June 25, 2024, from https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_529accountquestions

Compare 529 Plans By State. (2023, October 17). Forbes Advisor. Retrieved June 25, 2024, from https://www.forbes.com/advisor/student-loans/compare-529-plans-by-state/

Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available in such state’s 529 savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.

As with other investments, there are generally fee 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 education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. 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. This information was developed by Oechsli, and independent third party, for financial advisor use. Raymond James is not affiliated with and does not endorse, authorize or sponsor Oechsli. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

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