Lost in all the celebrations this time of year…Mother’s Day, Father’s Day, Memorial Day, High School and College Graduations, my birthday….is a relatively new day for celebration; May 29 in honor of Section 529 of the Internal Revenue Code. Enacted in 1996, 529 plans really started to gain popularity when the Economic Growth and Tax Relief Reconciliation Act of 2001 made qualified distributions tax-exempt.

So, a 529 Plan is very similar to a Roth IRA in that contributions are made with after-tax money and it then grows tax-free and distributions are tax-free. The main differences are: 1) distributions must be for qualified education expenses and 2) certain states have plans that provide state tax deductions (e.g. Georgia residents filing jointly can contribute $8k per year, per beneficiary, and receive a Georgia state income tax deduction…basically an immediate 5.75% return).

A common reason parents use to rationalize under-funding 529s is…what if my kid doesn’t attend college or receives a scholarship? While it is true that there is a 10% penalty for non-qualified distributions, the 529 does provide lots of flexibility including:

• Ability to change beneficiaries at any time without tax consequences. The new beneficiary must be a family member but the IRS provides a fairly broad definition of who a family member is. The new beneficiary could be the parent themselves.
• No time limit for withdrawals. Unlike another education funding vehicle, the Coverdell, which requires unused funds to go to the beneficiary at age 30, a 529 plan never expires.

The latest change to 529 plans comes from Secure Act 2.0 which was signed into law in late 2022. Beginning in 2024, up to $35k of unused 529 funds can be rolled into a beneficiary Roth IRA. Pick your compounding interest number, but $35k in a Roth IRA at age 25 or 30 will likely result in a sizeable sum of tax-free money when the beneficiary reaches full retirement age.

While most stores will not be selling inflatable 529 shaped balloons or cards commemorating the event, the creation of the 529 Plan is worthy of celebration.

Any opinions are those of the advisor and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.

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 for investment 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 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 education costs as anticipated. The tax implications can vary significantly from state to state.