529 accounts have always been a great way to save for your child’s education. They offer tax free growth as long as you use the funds for education. Starting saving at an early age can allow tax free compounded growth to provide a real advantage towards your education savings. The definition of education has expanded in recent years from just college and grad school to include any K through 12 tuition (such as private schools). New rules by the Secure Act 2.0 have expanded the use of 529 accounts starting in 2024.

Parents for years have questioned the need to save for education given the narrow use of 529 accounts. We hear all the time, what if my child gets a scholarship, doesn’t go to college or pursuers a more entrepreneurial career. Typically, if you do not use the funds for education the growth is taxed at ordinary income rates and faces an additional 10% penalty. Contributions can be taken out without tax or penalty. However, there are some exceptions to this rule. If your child receives a tax free scholarship then the 10% withdrawal penalty is waived.

To avoid any taxes or penalties, parents can also use this money for grad school, if their child gets a scholarship for undergrad. Parents can also change beneficiaries to a sibling, niece or nephew or even your grandchildren. New 529 Rules The new rule for 2024 is that you can now roll up to $35,000 into a Roth IRA for the benefit of your child. This can be a massive benefit as it allows the money in your child’s account to remain growing tax free until your child’s retirement. There are some rules you need to know:

  • The rollover to a Roth IRA can only be made to the beneficiary (typically the child) and not the owner (typically the parent or grandparent).
  • The 529 must be in existence for a minimum of 15 years.
  • Contributions and earnings made in the last 5 years do not count towards money that can be rolled over.
  • You can’t exceed the maximum IRA rollover in a given year. Current maximum IRA amount is $7,000 for those under 50. Essentially you’d have to roll this money out for 5 years ($7k per year).
  • Beneficiary must have earned income in year of the rollover.

Summary

Some are skeptical about putting money in a 529 account as it is hard to foresee the future. Will my child go to college or will college be free in the future. Our contention is that if the goal is to fully fund or even partially fund college, a 529 is a great savings vehicle to do so. Tax free growth is extremely powerful. The ability to add money each month, similar to your 401(k), makes saving for college easier. And now with even more added flexibility you can use this money for private middle school or high school, you can change beneficiary’s and now potentially roll to a Roth IRA the 529 remains a very attractive savings vehicle.