Benefits of Section 529, Tax-advantaged Savings Plans 

 

Section 529 plans allow parents and grandparents the ability to save for their children’s future college expenses in a tax-friendly manner.  Though there is no federal tax deduction for contributions to 529 plans, funds grow tax-free until distributed.  Distributions used for qualified education expenses are never taxed. 

  

In thinking of 529 plans, most of us think of the state tax deductions and credits often associated with these plans.  Recent federal legislation has provided three additional benefits: 

 

  • 529 funds may be used to cover elementary and secondary school tuition and expenses, subject to state adoption.  With this provision, if allowed in your state, you can essentially make private school K-12 tuition state tax deductible.  Currently, 40 states offer this advantage. 
  • 529 funds may now be used to pay off $10,000 of student loan debt. 
  • Beginning in 2024, excess balances of up to $35,000 in 529 funds can be rolled over to a ROTH IRA.  This is subject to specific requirements the particular 529 plan must meet.  

 

Most states offer a tax deduction or credit to incentivize contributions by residents to the state’s plan. Sometimes nonresidents who file a tax return in that state can also get the deduction or credit. 

 

Many states offer additional benefits or have additional provisions such as:

 

  • A deduction for rollovers into the state plan in addition to contributions 
  • Some states offer state tax benefits to employers for contributions to their employees’ 529 accounts 
  • Some states will require rollovers to another state’s plan to be included in taxable income 

 

There are nontax considerations as well in choosing which state’s 529 plan to invest in.

 

  • Fund expenses and fees vary by plan 
  • Some plans offer a greater variety of investments to choose from 
  • A growing number of states are offering promotions to invest in their plan. For example, the state might contribute $100 when you open the account. Others are offering to waive management fees for residents.  

 

Please contact us if we can provide further information on Section 529 college savings plans.  

 

Please consider Cornerstone Tax Advisor for your income tax planning, preparation, bookkeeping, and payroll needs.