This Halloween while you are busy filling up candy buckets, you might also think about filling up a 529 account. While candy may seem like a lot more fun, 529 plans are a smart way to ensure that your children, grandchildren or other loved ones have financial resources dedicated to help them avoid the scary reality of rising educational expenses and student debt.

Quick overview of 529 plans

A Section 529 education savings plan is a tax-advantaged investment account that can be used to save for qualified education expenses. Benefits of a 529 plan include:

• The earnings in a 529 plan grow tax deferred.
• Withdrawals from a 529 plan are income tax-free for federal purposes (and in most states) provided such withdrawals pay for college, vocational or other accredited school, and related expenses.¹
• Federal law provides that up to $10,000 in 529 plan distributions may be used annually for tuition costs for kindergarten through 12th grade. Distributions of up to $10,000 can also be made towards the costs of registered apprenticeship programs and qualified education loan payments. Not all states follow these particular rules, so be sure to check your state law if you are interested in using a 529 plan for one of these purposes.
• Starting in 2024, up to $35,000 of funds remaining in a long-standing 529 plan can be rolled into a Roth IRA on behalf of the designated beneficiary.
• You may set up and contribute to a separate account for each loved one you wish to benefit, or you can donate to a 529 account set up by another family member. Multiple 529 plans for the same beneficiary are permissible.

Choosing a 529 plan            

Because 529 plans vary among the different states, it pays to be a savvy shopper when deciding which state’s plan to use. For example, some states allow a state income tax deduction for their residents who contribute to their state’s 529 program, but some states do not. In addition, states have different rules as to what is a “nonqualified” education expense that may subject a 529 withdrawal to state income taxes, withdrawal penalties and the recapture of any tax deductions claimed. You should talk to a qualified professional about how various 529 plans and the related tax provisions affect your circumstances.

Gifting to a 529 plan

Contributions to a 529 account that qualify as an annual exclusion gift ($18,000 per donee in 2024) are generally free from gift tax and the generation-skipping transfer (GST) tax. Federal law also permits “front loading” a 529 account by contributing up to 5 years of annual exclusion gifts at once ($90,000 per person or $180,000 for married couples in 2024), but you must file a gift tax return electing to treat the gift as if it had been spread over five years. You also forgo using the annual exclusion amount in another way for that individual during those five years. If you die before the end of the five years, the portion of the gift reflecting the number of years still remaining will be included in your estate.²

Qualified higher education expenses³

529 plan withdrawals aren’t federally taxable (and may be tax-free at the state level as well) when used to pay for “qualified higher education expenses.” These expenses include:

• Tuition, fees, books and supplies
• Equipment required for enrollment or attendance at an eligible program
• Expense for special needs services in the case of a special needs beneficiary incurred in connection with enrollment or attendance at an eligible program
• Computer purchase, peripheral equipment and internet service while student is enrolled in eligible program
• Room and board

Changing the designated beneficiary

 If there is money left over in a beneficiary’s account, the account owner can change the beneficiary to another qualified family member without incurring income tax or penalty. Qualified family members include the beneficiary’s spouse, siblings, step-siblings, parents, step-parents, grandparents, nieces and nephews, aunts and uncles, first cousins, certain in-laws, and spouses of some of these individuals. Note, however, that if a new family-member beneficiary is in a lower generation than the previous beneficiary, gift and GST taxes may apply.

Rollovers from 529 to Roth IRA

As of January 1, 2024, Section 529 account owners are permitted tax- free and penalty-free rollovers from 529 education savings plans to Roth IRAs, with certain limitations. The lifetime rollover limit is $35,000, and the funds must be moved from a 529 account to a Roth IRA that benefits the same beneficiary. Also, the 529 account must have been in existence for at least 15 years prior to the rollover. You should talk to a qualified professional about these, and other rules related to a 529 to Roth IRA rollover and determine if the applicable state law provides similar tax benefits.

Conclusion

As you carve pumpkins and enjoy certain autumnal festivities, take a moment to plan for the education opportunities that await, making sure that the only thing haunting your family is a playful ghost and not the lack of funding for educational expenses.

For more information on strategies commonly used for funding education, visit our Funding Education resource page or reach out to your Relationship Manager.

Caroline McKay is a senior wealth strategist representing CIBC Private Wealth in Boston. She has over 15 years of industry experience.