Over the past and coming weeks, many families are celebrating high school and college graduations. Though parents of small children may consider this milestone far in the future, it’s never too early to begin planning for a student’s higher education. Many taxpayers are familiar with the tax advantages of 529 Plans (see related post), but may not be aware of the recently expanded flexibility and benefits that became effective in 2024.
The primary goal of the SECURE Act 2.0 was to encourage savings toward retirement; however, the legislation also provides additional incentives for educational savings. These updates, effective beginning in 2024, may significantly impact how families approach education savings and long-term financial planning.
While these provisions offer added advantages – such as the ability to roll unused 529 funds into a Roth IRA – there are also specific rules, limits, and eligibility requirements to consider. This post highlights key aspects of the expanded tax rules related to higher education savings programs that offer greater flexibility in how 529 plan funds can be utilized.
Tax-Free Rollovers from 529 Plans to Roth IRAs
Beginning in 2024, families can transfer unused 529 plan funds to a Roth IRA for the same beneficiary, subject to specific conditions:
- Lifetime Limit: Up to $35,000 per beneficiary.
- Annual Contribution Limits: Transfers count toward the annual Roth IRA contribution limit (e.g., $8,000 in 2024 for individuals under 50).
- 15-Year Requirement: The 529 plan must have been open for at least 15 years. The corresponding Roth IRA must also be in the designated beneficiary’s name.
- Five-Year Rule: Contributions and earnings made within the last five years are ineligible for rollover.
- No Income Limits: Unlike direct Roth IRA contributions, these rollovers are not subject to income restrictions per SECURE 2.0. However, the IRS has not issued guidance on this legislation and anticipated to do so in the future.
This provision provides families with greater flexibility, allowing them to repurpose education savings for retirement if the funds are not needed for educational expenses. See related post for more details.
Enhanced Flexibility for Grandparent-Owned 529 Plans
Previously, distributions from grandparent-owned 529 plans could impact a student’s eligibility for federal financial aid. The SECURE Act 2.0 improved this situation, making such distributions more favorable in terms of financial aid calculations. The updated FASFA application no longer requires reporting of 529 account owners by grandparents, which removes any adverse effect on grandchild’s financial aid eligibility. However, it’s important to note that while federal aid rules have been adjusted, institutional aid policies will still count these accounts against the student beneficiary when it comes to this aid.
Increased Contribution Limits and Superfunding Options
The annual gift tax exclusion for 529 plan contributions has been increased, allowing individuals to contribute more without triggering gift tax implications. Specifically, in 2025, individuals can contribute up to $19,000 (filing single) or $38,000 (filing joint) per beneficiary without filing a gift tax return.
Additionally, the “Superfunding” option permits a lump-sum contribution of up to $95,000 per beneficiary without incurring gift taxes. Taxpayers interested in the superfunding options should consider the following:
- Contributing more than $19,000 for the year 2025 – Smaller contributions do not make sense to spread across 5 years
- Contributions to beneficiary cannot exceed $95,000 in a year
- The election is all or nothing – Must be spread across 5 years and must be on the total contributions cannot pick a certain amount to spread across 5 years
- There is no joint election – Will need to file a gift tax return if both taxpayer and spouse are superfunding a 529 plan
- When gift tax annual exclusion rises annual lump-sum increases
- Passing away before the fifth year – Taxpayer must live until January 1 of the fifth year to “earn” full 5-year annual exclusion; if death occurs during year 4, 20% of the election amount will be included in gross estate
- Consider other gifts made during the year – Making non-529 plan gifts such as cash or stock reduces the allowance for 529 gifting
Expanded Qualified Expenses
The SECURE Act 2.0 broadened the scope of qualified expenses for 529 plans to include:
- Student Loan Repayment – Up to $10,000 lifetime limit can be used to pay down the beneficiary’s student loan
- Apprenticeship Programs – Funds can be used for qualified apprenticeship program expenses such as fees, supplies, necessary tools, etc. In order to qualify, the program must be registered with the Security of Labor’s National Apprenticeships Act
- K-12 Tuition – Withdrawals for K-12 tuition is now permitted, with a cap of $10,000/year
Looking Ahead: 2025 and Beyond
The SECURE Act 2.0 has already introduced several changes, but future legislation may further enhance 529 plan flexibility. Families should stay informed about updates that could impact education and retirement savings strategies. For questions about education or retirement planning, contact a GYF tax professional at 412-338-9300.
Related Posts:
Celebrate 5-29 by Considering a 529 Plan for Higher Education Savings
Unused 529Plan Funds Can Be Rolled Over to a Roth IRA
RaeAnna Wargo provided research and writing assistance for this post. As a Senior Tax Associate, she has nearly seven years of experience
