I Just Opened A College Savings Account For My Daughter, And This Is Everything I Learned In The Process (2024)

FAQs

Can my parents take away my 529? ›

529 plans are considered assets of the account owner, which is often a parent. The 529 plan account owner may change the beneficiary or take a distribution at any time for any reason, whether or not it is in the best interest of the original beneficiary. In most cases, parents appreciate this flexibility.

In most states, that means age 18, though in some states the age threshold may be higher. The custodian can't change the beneficiary or account owner. Once the account owner/beneficiary becomes an adult, they assume control over the 529 plan.

Also known as 529 college savings plans, these are tax-advantaged investment accounts designed for education savings. They work much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. 529 plans offer several investment options from which to choose.

Yes, you can withdraw from your 529 plan at any time. However, ensure you use your withdrawals for that year's qualified expenses.

The grandparent loophole allows grandparents to use a 529 plan to fund a grandchild's education without affecting the student's financial aid eligibility. Previously, withdrawals could have reduced aid eligibility by up to 50% of the amount of the distribution.

Your 529 can be used for student loan repayment up to a $10,000 lifetime limit per individual. Up to $10,000 annually can be used toward K-12 tuition (per student). You can transfer the funds to another eligible beneficiary, such as another child, a grandchild, yourself or a friend.

As of January 1, 2024, owners of 529 plan accounts can make tax and penalty-free rollovers to Roth IRA retirement plan accounts, subject to certain limitations. This has been welcome news to many families who worried about having unused or leftover funds in a 529 plan account.

Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.

But, the reality is that many families get a late start on saving for college. Parents who open a 529 plan when their child is a high school freshman or later can still take advantage of the federal (and sometimes state) tax benefits, even if college is just a few years away.

What happens to unused 529 funds? Your 529 account will never expire, even if your child ends up not using it. You can leave the funds in the account, allowing investments to grow tax-deferred, and use the funds down the road for a grandchild or another qualified family member.

What is the 2k rule for college savings? ›

The rule is simple. Multiply your child's age by $2,000. That tells you how much you should have saved already at that specific age to be on track to cover 50 percent of college costs. For instance, if your child is seven years old, you would multiply $2,000 by seven and come up with $14,000.

Leave the account intact.

If your child is simply not sure about college or perhaps wants to delay applying, you can keep your 529 plan intact until the child does use it for qualified education expenses.

The leftover 529 funds can't be used for other types of consumer loans (such as credit cards or personal loans). Roll the leftover 529 funds into a Roth IRA. Also new with the Secure 2.0 Act, you'll be able to roll a portion of the unused 529 funds into a Roth IRA.

It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.

And when you pull the funds out, as long as they're used for qualified higher education expenses, there's no federal income tax on the distribution and often no state income tax. 529 accounts also receive some favorable treatment for financial aid purposes, so they're really a great way to save for college education.