Perhaps no other savings program has been tinkered with as much as the one involving 529 plans since they were launched nearly 30 years ago.
The most recent changes, which became effective in 2024, took away the biggest objection to owning a 529 plan: What if I overfund the account?
Thanks to the SECURE Act 2.0, Congress now allows the owners of overfunded 529 accounts to move as much as $35,000 into a Roth IRA for the same beneficiary. To qualify, the 529 needs to be in place for at least 15 years and the rollover must meet the Roth IRA contribution limits ($7,000 in 2025).1
So if you are considering funding a child’s or grandchild’s education, give some thought and prayer as you prepare to commit to a savings program. As Mick Owens explained in his popular book, Diamond of Life: The Five P’s of Success and Significance, “Give careful thought to your ways and let Him direct you in His Ways.
“Start children off on the way they should go, and even when they are old they will not turn from it.” Proverbs 22:6
History of 529 Plans2
Year | What happened? |
|---|---|
1986 | The first prepaid tuition plan was set up in the state of Michigan. |
1994 | Michigan wins a lawsuit against the IRS. The win allowed plans to get a refund on federal income tax on the plan’s investment earnings. |
1996 | Section 529 was added to the Internal Revenue Code. The change allowed qualified state programs and deferred tax on participants’ undistributed earnings. |
2001 | 529 earnings are made exempt from federal income tax as opposed to deferring tax on the undistributed earnings. |
2015 | Laptops, tablets and other computer equipment is added to the list of college expenses that can be paid for by using 529 funds. |
2017 | K-12 schools become eligible (up to $10,000/year). |
2024 | The SECURE Act 2.0 goes into effect. Up to $35,000 can be rolled over from a 529 plan to a Roth IRA. |
529 Plans: A Review of the Basics3
A 529 plan is a savings plan that can provide tax-free investment growth and withdrawals for qualified education expenses. Parents, grandparents, or anyone else who wants to help with education expenses can start a 529 plan. In Indiana, taxpayers making contributions to Indiana 529 may receive a state income tax credit equal to 20% of their contributions. Married taxpayers who contribute $7,500 might receive a $1,500 credit if they meet other eligibility requirements.
However, state tax laws and treatments vary, and some state tax laws may differ from federal tax laws. So, if you live outside of Indiana, call us for details on your state.
Did You Know: The state that sponsors your plan doesn’t have to play any role in where your child goes to school. Your student can use the money in any state.4
Remember, the state tax treatment of 529 plans is only one factor to consider before committing to a savings plan. Also, consider the fees and expenses associated with a particular plan. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.
- PrivateBank.JPMorgan.com, 2024. Contributions made to the account in the five years before the rollover are ineligible for transfer.
- FutureMoney.co, 2024
- Fidelity.com, 2024
The exception is a prepaid 529 plan, which allows you to prepay tuition at an in-state, public college, locking in the cost at current tuition rates. Only a few states offer prepaid 529 plans.
