Initiated in 1996, 529 plans have long been considered the best way to save for a child's college education. These state-sponsored investment accounts offer tax-free earnings and withdrawals to use for tuition and other qualified educational expenses.
However, 529 plans had a big limitation: The money could only be used toward education. There would be a penalty for withdrawing the money for another purpose if a child didn't go to college or didn't need all of the funds for school.
That restriction has now been removed, as changes to retirement savings regulations that went into effect on Jan. 1 mean money in a 529 plan can be rolled over into a Roth IRA account without a tax penalty.
Here's what you need to know about 529 college savings plans, including what the changes could mean for you.
What is a 529 plan?
Also known as a qualified tuition program, a 529 college savings plan is an investment account with tax-deferred earnings and tax-free withdrawals. Initially, the funds had to be spent on post-secondary education, but in recent years the parameters have been expanded to include tuition for kindergarten through high school, continuing education, apprenticeships and up to $10,000 in student loans.
If you're looking for a private student loan, CNBC Select recommends College Ave for its low rates and flexible repayment terms. Plus, borrowers with qualifying credit don't need a co-signer to get approved.
College Ave
Eligible borrowers
Undergraduate and graduate students, parents
Loan amounts
$1,000 minimum; maximum cost of attendance
Loan terms
Range from 5 to 20 years
Loan types
Variable and fixed
Borrower protections
Deferment, forbearance and grace period options available
Co-signer required?
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Terms apply.
Each state offers its own 529 plan, though most are available to all US residents. In-state account holders may enjoy special benefits, from tax deductions to matching grants.
There are two main types of 529 plans: Education savings plans, which grow tax-deferred and have tax-free withdrawals if used for educational expenses, and prepaid tuition plans, which enable account holders to pay current tuition rates for future attendance at specific state institutions.
One of CNBC Select's top picks is My529 (Utah), which has a range of age-based portfolios that automatically rebalance to become more conservative as the child approaches college age. Fees are relatively low, and there is no minimum contribution or balance requirement.
my529 (Utah)
Minimum opening balance
None
Maximum overall contribution
$540,000
Portfolio options
4 age-based options with various risk tolerance, which automatically rebalances each year; 10 static options based on risk tolerance and U.S. stocks and bonds (investors will need to manually change their allocations); 2 customizable options (either age- or static-based)
Underlying funds
Investors can choose from Dimensional Fund Advisors mutual funds, PIMCO Interest Income Fund, Vanguard Group funds and FDIC-insured accounts from Sallie Mae Bank and U.S. Bank
Fees and expenses
Total asset-based expense ratio: 0.131% to 0.136% for my529 target-date options; 0.130% to 0.455% for customized static and age-based options, depending on investment mix; 0.211% for stable value option
Terms apply.
While it offers unique tax breaks to Buckeyes, the CollegeAdvantage (Ohio) 529 plan is also available to residents nationwide. It's one of the top-performing plans for 10-year returns, according to data from SavingforCollege.com, with low-fee portfolios that can be age-based, risk-based or custom-designed.
CollegeAdvantage (Ohio)
Minimum opening balance
$25
Maximum overall contribution
$523,000
Portfolio options
Choose from age-based, risk-based, DIY options and FDIC-insured accounts
Underlying funds
Age- and risk-based portfolios from Vanguard; individual options includes ones from Dimensional Fund Advisors and Vanguard
Fees and expenses
Total asset-based expense ratio: 0.145% to 0.435%
Terms apply.
How are 529s changing?
Previously, any withdrawals not used for educational expenses were subject to federal income tax plus an additional 10% penalty on earnings. As of Jan. 1, 2024, however, unused funds from a 529 plan can be rolled over into a Roth IRA account tax-free.
A Roth IRA from Charles Schwab allows users to contribute after-tax money with no monthly service fee or minimum deposit requirement. There are no commission fees for stock and ETF trades and no transaction fees for thousands of mutual funds.
Charles Schwab
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No account minimum for active investing through Schwab One® Brokerage Account. Automated investing through Schwab Intelligent Portfolios® requires a $5,000 minimum deposit
Fees
Fees may vary depending on the investment vehicle selected. Schwab One® Brokerage Account has no account fees, $0 commission fees for stock and ETF trades, $0 transaction fees for over 4,000 mutual funds and a $0.65 fee per options contract
Bonus
None
Investment vehicles
Robo-advisor: Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ IRA: Charles Schwab Traditional, Roth, Rollover, Inherited and Custodial IRAs; plus, a Personal Choice Retirement Account® (PCRA) Brokerage and trading: Schwab One® Brokerage Account, Brokerage Account + Specialized Platforms and Support for Trading, Schwab Global Account™ and Schwab Organization Account
Investment options
Stocks, bonds, mutual funds, CDs and ETFs
Educational resources
Extensive retirement planning tools
Terms apply.
The change to 529 plans is one of many updates to retirement savings brought by the Secure 2.0 Act, passed in December 2022.
There are still some restrictions on 529 plans: The account must have been open for at least 15 years before rolling over into a Roth IRA and money contributed in the last five years is not eligible. Any money rolled over is subject to yearly Roth IRA contribution limits and there is a lifetime transfer cap of $35,000.
FAQs
What is the maximum I can contribute to a 529 plan?
Each state sets maximum plan contribution limits per beneficiary, known as an aggregate contribution limit. Depending on the state, this cap can range from $300,000 to $550,000 per beneficiary.
Who has control of a 529 plan?
529 plans are custodial accounts, so an adult has legal control over contributions, investments and disbursals on behalf of a minor. Once the beneficiary turns 18, they can assume control of the account.
Are there fees associated with a 529 plan?
All 529 plans carry fees, but they vary depending on which state is sponsoring the account. Most frequently, account holders pay an expense ratio, an annual fee based on a small percentage of the assets in the account. If you work with a broker, your expense ratio will likely be higher — and you may also be assessed a commission.
It's less common, but some 529 plans also charge enrollment fees, annual fees or monthly account maintenance fees.
Do I have to pay gift tax on contributions to a 529 plan?
You can generally contribute up to $17,000 a year (or $34,000 for married couples) without being subject to the gift tax. Alternatively, you can make a one-time contribution of up to $85,000 ($170,000 for couples).
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Bottom line
New changes to the rules for 529 plans mean they can be used for retirement, not just a college education.
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