Jumpstart Your Child’s Retirement Funds With a 529 Plan — Here’s How

Happy African American high school student walking through hallway with her friends and looking at camera.
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As college costs continue to rise, parents with children of any age are wise to think about saving for post-secondary education now. If you already have an emergency savings established and are putting away money for retirement at a rate you feel comfortable with, you can consider contributing to your child’s future college education.

If you have the means to pull some of your discretionary income for college savings, you have many choices in investment vehicles — depending on your child’s age and your risk tolerance. For many families, a 529 college savings plan is the right answer, according to experts.

And the savings plan just got better. Beginning in 2024, you can transfer unused 529 funds into a Roth IRA for the original beneficiary. This new rule, part of the SECURE Act 2.0, makes sense, as the two investment vehicles are fairly similar, albeit with different purposes.  

In an article for Forbes, Ed Flores — a finance writer, entrepreneur, and parent — wrote about 529 plans: “I generally describe them as Roth IRAs for education.”

A 529 college savings plan takes contributions from after-tax dollars, which means you can automate your contributions from your bank account or sock away extra cash as you have it. The money enjoys tax-free growth, and distributions for college expenses get taken out, tax-free.

Besides the flexibility, there are tons of other benefits to a 529 college savings plan.

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Fund Your Child’s 529 With Gifts

If you’re just barely scraping by, have high-interest debt, or aren’t on track to meet your retirement goals, a 529 may still be a good option for your children, since the plan allows anyone to contribute.

If your child receives cash for their birthday or holidays, you can encourage them to set aside a small amount, whether that’s 10% or 50%, into a college savings plan. When your child is old enough to hold a job, they should begin thinking about their own college savings. Perhaps they might place at least a portion of their check into a 529.

As of 2023, an individual can gift up to $17,000 into a 529 plan — and those funds won’t count against the lifetime gift tax exemption amount of $12.92 million (or $25.84 million for couples). For couples donating to a 529 plan, that tax-exempt gift amount of $17,000 is doubled to $34,000.

If you have kind-hearted parents, grandparents, aunts, uncles or friends, they can pay into your child’s 529 without worrying too much about how it may affect their other wealth transfer plans.

529 Plan for Wealth Transfer

The gift contribution limits rule also applies to parents paying into their child’s 529 plan. If you’ve received a substantial inheritance, for instance, you can contribute up to $17,000 per parent into each child’s 529, per year, without it counting toward your allowable tax-free lifetime gift limits.

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And if you’re at the stage where you are thinking about preserving and transferring generational wealth, a 529 plan is a good start.

Catch Up On College Savings

If you find you’ve fallen behind on saving for college — or you feel it’s already too late to start making a difference in your child’s college fund — you can “superfund” your child’s 529 plan if you have the financial resources. That means you can contribute up to $85,000, or $17,000 times five, in a single year without tax ramifications, according to Fidelity.com. This does mean that any further contributions above that threshold will be counted against your gift tax exemption.

By superfunding the plan, according to Fidelity, you may be able to generate more earnings, faster, as your investment compounds. Grandparents may use superfunding as part of their estate planning, to distribute some of their wealth to grandchildren tax-free.

Limitations of 529 Plans

Parents and students should keep in mind that only distributions for “qualified higher education expenses” (QHEEs) are tax-free when you’re ready to start withdrawing from the 529.

QHEEs include:

  • Tuition.
  • Books.
  • Room and board.
  • Supplies (including electronics).
  • Fees.

You can also use the 529 plan to pay for up to $10,000 in tuition expenses for K-12 private schools.

If your child has money left over in their 529 after college, they can also use it to pay off up to $10,000 in student loans, according to Charles Schwab.

What Happens If Your Child Doesn’t Go to College?

Parents may worry that the money in a 529 will go to waste (or vanish) if their child opts not to go to college. However, you can transfer the 529 to any other family member, ranging from a sibling to a first cousin, aunt, uncle, or even yourself.

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That family member can use the funds, tax-free, to pay for QHEEs, K-12 tuition, or existing student loans. You can change the beneficiary of a 529 once per year, in most cases — and can even transfer it back to the original beneficiary. This offers the utmost flexibility for evolving life plans, all without tax ramifications.

New in 2024, as a result of the SECURE Act 2.0, you can also transfer the funds in a 529 college savings plan to a Roth IRA. The Roth IRA must be in the name of the original beneficiary, which would give your child a headstart on retirement savings.

In most scenarios, a 529 savings plan stands as a wise, tax-sheltered choice to help secure your child’s financial future no matter what life path they choose.

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