What are 529 plans?

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529 plans are tax-advantaged savings plans designed to encourage saving for future education costs. There are two primary types of 529 plans: investment plans and prepaid plans.

Investment Plans

Investment 529 plans function similarly to a Roth IRA for education expenses at the federal level. Contributions are made with post-tax dollars, and the investments grow tax-free. Withdrawals are also tax-free, provided they are used for qualified educational expenses, which include tuition, books, and other education-related costs. Some states may offer state tax deductions for contributions to a 529 plan 1 2.

Prepaid Plans

Prepaid 529 plans allow you to prepay for tuition at current rates, locking in the cost of a semester or year of college to be used in the future, potentially saving money if tuition fees increase over time 1.

Special Considerations

  • Custodianship: Typically, parents are the custodians of the 529 account, and it's considered a parental asset. This is advantageous for financial aid calculations, as parental assets are assessed at a lower rate compared to student assets 3.

    Maximizing 529 Plans

    Seonwoo explains the benefits of 529 plans for education savings, highlighting the tax advantages and strategies to optimize financial aid eligibility. Grandparent-owned 529 plans can be a smart move to minimize assets considered in FAFSA calculations.
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    154 | Hacking The FAFSA | Brian Eufinger and Seonwoo Lee
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  • Grandparent Strategy: Grandparents can open a 529 plan for their grandchildren, which can be beneficial as the funds are not considered in FAFSA calculations until used, potentially maximizing financial aid 3.
  • Rollover to Roth IRA: Starting in 2024, unused 529 funds can be rolled over into the beneficiary's Roth IRA, up to a $35,000 lifetime cap. This can be a useful tool for excess funds, but comes with restrictions, such as the 529 account needing to be at least 15 years old, and the rollover amount being counted against the annual Roth IRA contribution limit 4 5.

Overall, 529 plans provide a flexible and tax-advantaged way to save for education, with additional strategies to maximize their benefits based on individual circumstances.

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