Jul 4, 2024
As the cost of higher education soars, 529 plans are widely recognized as a powerful hedge against college’s escalating costs. Yet many Americans are unaware of their full potential.
A new study finds that while these tax-advantaged savings plans are commonly associated with funding college tuition, many 529 savers may not realize the full range of expenses these plans cover.
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Named after Section 529 of the Internal Revenue Code, 529 plans are state-sponsored, tax-advantaged saving plans for future education costs. They come in two main types: prepaid tuition plans and education savings plans.
Prepaid tuition plans allow contributors to pay for future tuition and mandatory fees at today’s prices. However, they are typically limited to in-state public colleges and universities and have residency requirements.
Education savings plans are investment accounts that offer more flexibility, allowing funds to be used at any eligible institution, including out-of-state and private colleges, as well as vocational and trade schools. As with all investments, you can lose money in an education savings plan.
Contributions to a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified education expenses. People use these funds for tuition, fees, and required textbooks, but the scope of eligible expenses is much broader than many of us realize.
Lesser-Known Uses of 529 Plans
Despite being an essential tool for education savings, an Edward Jones survey reveals that half of American adults (50%) are unfamiliar with 529 plans, and fewer than a quarter have opened one.
Additionally, only 25% are aware that 529 plans can be used for expenses beyond higher education. The survey found that a significant barrier to adoption is the misconception that substantial savings or income are necessary to start a 529 account.
If you thought that 529 plans were limited to conventional tuition savings, it may be time to explore the following 529 plan options:
Vocational and trade schools
Vocational and trade schools provide valuable training and education in various trades and technical fields and can lead to high-paying, in-demand careers. Families looking to fund trade school education for their children or themselves can benefit greatly from utilizing 529 plans.
Room and board
The cost of housing and meal plans is a 529-qualified expense for students enrolled at least half-time. This can alleviate the cost of college, as room and board costs often rival tuition fees.
Repayment of student loans
The SECURE Act, passed in December 2019, allows up to $10,000 from a 529 plan to be used to pay off student loans.
Rollover to a Roth IRA
One of the least known benefits of 529 plans could be one of the most powerful. Starting in 2024, beneficiaries of 529 plans can roll over up to $35,000 into a Roth IRA over their lifetime, provided the 529 account has been open for at least 15 years. This makes it possible to repurpose unused education savings for retirement, boosting a person’s long-term financial security.
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Maximizing 529 plan benefits
To get the most from your 529 plan, it helps to understand the various qualified expenses and plan strategically. Here are some tips:
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Stay informed about eligible expenses: Regularly review the list of qualified expenses on the IRS website or consult a financial adviser to ensure you know how to use your 529 funds.
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Plan for multiple beneficiaries: If one child does not use all the funds in their 529 plan, the remaining balance can be transferred to their sibling, tax-free and without penalty. This flexibility can help you maximize the money you’ve saved.
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Consider long-term planning: Given the new rollover provisions to Roth IRAs, families can now consider using 529 plans as a dual-purpose savings vehicle for education and retirement. This long-term strategy can provide significant tax advantages and financial security.
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Finding a trusted provider: Choosing the right 529 plan provider is important. Look for transparency in fees and fund performance, responsive customer service, and flexible investment options that suit your risk tolerance and goals. Also, consider age-based portfolios, which adjust automatically as the beneficiary approaches college age.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
