Blog & Newsroom

Individuals who have set up 529 plans need to be aware of recent changes to the plans.

Created to fund educational expenses, 529 plans are tax-advantaged education savings plans. All contributions to a 529 account grow tax-free, and withdrawals are tax-free if the money is used to pay for qualified education expenses.

Ohioans can deduct up to $4,000 of contributions made to an Ohio plan per year from their Ohio taxable income for 529 plans.

While these plans are set up for a beneficiary, usually a child or grandchild, they do carry some liability. The biggest risk in setting up a 529 plan is that there is no guarantee the beneficiary will need the funds for education.

Should a beneficiary decide to skip college and go straight to the workforce, the full benefits of the 529 plan cannot be realized, and funds cannot be withdrawn penalty-free.

However, a new rule included in the SECURE 2.0 Act of 2022 will allow 529 plans that are not utilized for qualified education expenses to be converted into a Roth IRA with being penalized.

Prior to this change, owners of 529 plans whose beneficiaries who could not use the plan for qualified educational expenses were faced with paying withdrawal penalties on any unused funds in their accounts.

Now, unused funds from a 529 plan can be rolled into a Roth IRA free of tax or penalties, as long as the account has been open for at least 15 years. One additional condition disallows any money contributed from the previous 5 years to be rolled over. Finally, the rollovers are subject to annual Roth IRA contribution limits with a lifetime cap of $35,000.

Additional changes now in effect aim to assist grandparent-owned accounts as well.

Prior to the changes, any distributions to the student or to the student’s school were added to the student’s income on the following year’s FAFSA. This led to drastic increases in income being reported on the FAFSA and potentially disallowing financial aid that the student would have received. This income reclassification is no longer required for grandparent-owned accounts, as they will be treated the same as parent-owned accounts for FAFSA purposes.

The new rules mentioned above offer much more flexibility when saving for educational needs for children and grandchildren.

In a time where education costs are increasingly on the rise and student debt is impacting so many, these updates were greatly needed to promote saving for both educational costs and for retirement.

If you have any questions on 529 plans, including qualified expenses or how to roll the funds over into a Roth IRA, please contact the Zinner & Co. Tax Team.