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A 529 plan, known as a Qualified Tuition Plan (QTP), is a tax-advantaged savings plan sponsored by a state or state agency and designed to be used for a designated beneficiary’s education expenses. A QTP is set up to allow an individual to prepay or contribute to an account established to pay a student’s (a designated beneficiary’s) qualified education expenses. The beneficiary can be the same person who sets up the 529 account.
No amount of distribution or earnings under a QTP should be included in the gross income of a designated beneficiary or a contributor to such program on behalf of a designated beneficiary. Contributions made to a QTP are not deductible from income for federal income tax purposes; the contributions are made using after-tax dollars. The 529 account owner keeps control of the funds, can make investment decisions, and can change the beneficiary. There is no annual contribution limit to a 529 account, but each state has a different aggregate contribution limit for the 529 account.
A person may also gift money to a 529 account. Such contribution is generally not subject to gift tax if the amount of the contribution is less than the annual gift tax exclusion, which in 2024 is $18,000. These contributions are generally considered to be out of the account owner’s estate.
Historically, withdrawals from 529 plans have been free from federal income tax if the funds were used for qualified higher education purposes, which means tuition, fees, books, supplies, and equipment that the designated beneficiary must have, as well as certain room and board expenses for an eligible student. In 2017 the Tax Cuts and Jobs Act (the TCJA) expanded the tax benefits to include withdrawals from 529 plans of up to $10,000 per beneficiary per year to use for K-12 education. The earnings on these withdrawals are exempt from federal income tax, however, not all states provide for exemption from state income tax for withdrawals for K-12 tuition.
SECURE 2.0, which was signed into law in December 2022, builds on the SECURE Act of 2019 and further expands the advantages of a 529 account. Pursuant to SECURE 2.0, a 529 account beneficiary is permitted, after 15 years, to roll over up to $35,000 over his or her lifetime from the 529 account into a Roth IRA, subject to annual Roth IRA contribution limits.
Consult your estate planning attorney and tax professional to understand how setting up a 529 account may benefit you, and how the SECURE 2.0 changes apply to you.