Making Dollar$, Making $ense: Enhanced Benefits for 529 Plan Account Beneficiaries

Family members who planned ahead for college costs may now have an additional benefit available with the 529 college savings plans.  For families that have funds left over in their 529 accounts after college was paid for, there have historically only been a few ways to extract the funds.  Each way has its own set of advantages and disadvantages.  Gains that are removed from the accounts and not used for higher education costs have always been taxed and hit with an additional 10% penalty.  Your contributions always come back without taxation because the 529 plan was funded with after tax dollars.  Another key point to remember is that the beneficiary can be changed to another child in the family or a person of direct lineage to that child and the money can be used in the same tax-free manner.    

The new twist with 529 plans since the Secure Act 2.0 was passed is that you can potentially draw up to $35,000 from the 529 plan and have it moved to a Roth IRA in the beneficiary’s name.  The ability to swap out college dollars that have accumulated, for retirement dollars, is a substantial upgrade in how the plans work.  Now remember, the Roth is a longer-term retirement-based account, so it is important to keep the monies invested and working.  Gains removed from the Roth account while under 59.5 years of age will subject the beneficiary to the same penalty and taxes that the 529 plan would have generated.  The cherry on top with the Secure Act 2.0 is that you can now use the funds for anything in retirement via the Roth and never pay a dime in taxes while getting years of tax deferred growth and withdrawals.

The upgrade to these plans by way of the Secure Act 2.0 is a good thing and gives more flexibility to the account holders and beneficiaries.  It is important to stay updated about changes in the retirement and savings landscape.  At Marzano Capital Group, we strive to educate our clients along the way.  If you want an education about how 529 plans work or how they have changed, please do not hesitate to reach out!

Securities offered through LPL Financial. Member FINRA/SIPC. Marzano Capital Group is an other business name of Independent Advisor Alliance, LLC. All investment advice is offered through Independent Advisor Alliance LLC, a registered investment advisor. Independent Advisor Alliance is a separate entity from LPL Financial.


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