The landscape of college savings is undergoing a dramatic transformation, fueled by increased flexibility in 529 plans. Recent data reveals a significant surge in contributions and a heightened interest in these tax-advantaged accounts, driven largely by the introduction of 529-to-Roth IRA rollovers. This new feature, coupled with rising college costs and a renewed focus on financial planning, is prompting more families than ever to embrace 529 plans as a strategic tool for securing their children’s future.
Key Takeaways: The 529 Plan Revolution
- New Flexibility: The ability to rollover funds into a Roth IRA is a **game-changer**, significantly impacting parents’ decisions to open and contribute to 529 plans.
- Record Investments: Total investments in 529 plans soared to $508 billion in June 2024, a 13% increase year-over-year.
- Increased Contributions: The 529-to-Roth rollover benefit is motivating approximately 57% of families to increase their contributions.
- Higher Contribution Limits: Annual gift tax exclusion for 529 contributions rose to $18,000 per child in 2024, further incentivizing savings.
- Addressing Past Concerns: The rollover option mitigates the risk of overfunding and provides a safety net for families whose children may not pursue higher education.
Flexibility ‘Motivates’ 529 Funding
The added flexibility offered by 529 plans is proving to be a powerful incentive for savers. A recent report by Saving For College, a company dedicated to increasing 529 plan accessibility, highlights the significant influence of the Roth IRA rollover option. A startling 23% of parents cited this feature as a primary factor in their decision to open a 529 plan. This trend is further underscored by the fact that 76% of respondents who do not currently own a 529 plan are now more inclined to open one due to this new benefit. The survey, which polled over 1,100 adults, strongly suggests that awareness of these new features is directly correlated with increased participation.
Expert Insights on the Impact of Flexibility
“Knowing there’s a little more flexibility does help motivate clients to fund a 529,” noted David Nienaber, a financial planner and shareholder at Foster & Motley Wealth Management, a firm ranked among CNBC’s top financial advisory firms. This sentiment is echoed across the financial planning industry.
529-to-Roth Rollovers: ‘Icing on the Cake’
Prior to recent legislative changes, 529 plan withdrawals were largely restricted to **qualified** education expenses, specifically tuition, fees, books, and room and board. While these restrictions have been eased in recent years to include expenses such as continuing education courses, apprenticeship programs and even student loan repayments, the ability to roll funds directly into a Roth IRA represents a massive advancement in flexibility. This has been particularly well-received by those working in finance.
Expanding beyond Traditional Education
According to Nienaber, the 529-to-Roth rollover feature is “**the icing on the cake**,” addressing a significant prior concern: what happens if a child doesn’t attend college or doesn’t use all the funds? This was a substantial barrier to entry for many, as highlighted by Vincent Birardi, a wealth advisor at Halbert Hargrove Global Advisors. Birardi emphasized that the fear of tax consequences associated with removing excess funds was a deterrent for families.
“The potential of overfunding a 529 plan account and having to face tax consequences with removing excessive funds has been a real concern for many education savers over the past few years,” said Birardi.
Martha Kortiak Mert’s Perspective
“Of the new benefits, this is the one we’ve seen the most excitement around,” says Martha Kortiak Mert, chief operating officer at Saving For College, underscoring the industry-wide recognition of the positive impact. “**The problem this solves is the barrier to entry**,” she added. “This opens up possibilities, new opportunities of what they can do with this kind of account.”
Understanding the Limitations
While this expanded flexibility is significant, there are still certain limitations. The 529 account must have been open for at least 15 years, and contributions made within the last five years are ineligible for rollover. Rollovers are also subject to annual Roth IRA contribution limits and a $35,000 lifetime cap on 529-to-Roth transfers.
Total Investments in 529s Hit $508 Billion
Despite the inherent advantages of 529 plans, previous years saw contributions often sidelined due to competing financial priorities. The high cost of higher education and rising student loan debt further complicated the decision-making process for many families. However, the trend has shifted dramatically this year.
Rising Participation and Increased Contributions
The introduction of the 529-to-Roth rollover option, coupled with increased awareness and the rising cost of college, has contributed to a surge in 529 plan participation. Reports from the College Savings Plans Network indicate that total investments in 529 plans reached a remarkable $508 billion in June 2024, a significant 13% jump from the previous year’s $450.5 billion. This demonstrates a clear and dramatic shift in how families are approaching college savings.
How Much You Can Contribute to a 529 Plan
The 2024 tax year brought along increased contribution limits, further bolstering the attractiveness of 529 plans. Individuals can now gift up to $18,000 per child annually (or $36,000 for married couples filing jointly) without triggering gift tax implications. This represents an increase from $17,000 the previous year.
Expanding Access and Encouraging Grandparent Contributions
The reach extends beyond immediate parents. Anyone can contribute to a 529 plan, and a notable “loophole” allows grandparents to contribute without affecting a grandchild’s financial aid eligibility. This broadens the potential for financial support from extended family.
Superfunding 529 Accounts for High-Net-Worth Families
High-net-worth families interested in maximizing their contributions can explore “superfunding” their 529 accounts. This involves front-loading five years of tax-free gifts, allowing for contributions of up to $90,000 annually for an individual or $180,000 for a married couple. This approach needs to be approached carefully considering the five-year rule.
Fidelity highlights that a larger, lump-sum contribution upfront can potentially generate greater earnings than smaller contributions spread out over time due to the compounding effect over a longer investment horizon.
