And three states - Indiana, Utah and Vermont - offer additional tax credits for contributions. Saving for College notes that most states with personal income tax allow at least some portion of 529 contributions to be deducted from state taxes. While the distributions aren't taxed federally, they are taxed by those 12 states.Ĭonversely, several states provide additional incentives for 529 plans, including tax breaks on contributions. Several states do not follow the rule changes for K-12 education or student loans, and it's possible that some states may not implement the latest rule change for Roth IRA rollovers.Īccording to College Investor, 12 states - including California, Illinois, Michigan and New York - do not allow 529 funds to be used tax-free for K-12 education.
#529 distributions rules free#
The most important caveat for 529 plans is that they are not run by the federal government but by states, which are free to set their own rules. What else should families know about the new 529 plan rule change? Last year, the Free Application for Federal Student Aid decided that distributions from grandparent-funded 529 plans would not impact students' eligibility for financial aid. In 2019, the original Secure Act allowed up to $10,000 of 529 plan funds to be used to pay off principal or interest on student loans. The Tax Cut and Jobs Act of 2017 expanded 529 plans to include $10,000 per year for K-12 education. The new rule allowing Roth IRA rollovers follows several recent changes designed to make 529 plans more attractive to investors. The IRS will likely issue clarifications on the new 529 rules before they take effect on Jan. Though the language of the bill is ambiguous, "it appears that the parent would be able to change the beneficiary to themselves and transfer the 529 plan's account value to their own Roth IRA," according to financial planner Michael Kitces. It's not yet clear if the rules will allow changes in plan beneficiaries or if that would reset the 15-year timer.
Annual contribution limits for IRAs still apply.Rollovers can only be made to a beneficiary's Roth IRA.Total rollover amount cannot exceed $35,000.Rolled-over funds must have been in the account for five years.The 529 plan must be at least 15 years old.Starting in 2024, money from a 529 plan that isn't used for educational purposes may be rolled over into a Roth IRA without penalty as long as certain conditions are met: The latest rule change addresses the problem of remaining funds.
Under current rules, any money in a 529 account not used for education, either because a child doesn't attend school or pays less than expected, is subject to a 10% penalty when withdrawn. Your contributions are taxable, but the earnings you gain from the account - profit from investment or cheaper tuition when prepaid - are tax-free, as long as you use that money for education. Funds from 529 plans cannot be used for travel, health care, applications or testing fees.ĥ29 plans work a bit like Roth IRAs. They can apply to higher education like college or graduate school, or up to $10,000 per year for expenses at K-12 schools (depending on state rules). Such expenses include tuition, fees, books and supplies, as well as room and board. Generally, 529 savings plans let parents, relatives, friends and students 18 years and older save money for "qualified educational expenses" for themselves or a beneficiary. Only nine states offer prepaid tuition plans, while almost all states (except Wyoming and Washington, DC) offer 529 savings plans. There are two types of 529 plans: tuition prepayment plans and tax-advantaged savings plans.
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