Income limits 529 savings plan?
In many ways, a 529 college savings plan has fewer restrictions than other college savings plans. These plans have no income or age restrictions and the upper limit on annual contributions is typically about $300,000 (varies by state).
Many tax-advantaged savings accounts have income limits that determine contribution eligibility. There are no income limits for 529 plan contributions.
There are also no income limits on 529 plan contributions. People often have the misconception that the maximum amount they can save into a 529 plan is $15,000 per year.
Lifetime maximum: The 529 transfer is subject to a lifetime maximum of $35,000 from a 529 plan account to a Roth IRA. Roth IRA contribution limits still apply. For 2023, those limits are $6,500 per year if the beneficiary is under 50 and $7,500 per year for those over 50. These limits are subject to change every year.
It allows a gift giver to make a lump sum contribution of up to five times the annual gift tax exclusion and spread it over five years. 21 This means that for 2023, you can contribute up to $85,000 to a 529 account. 22 The amount will not reduce your lifetime gift and estate tax exemption.
Four states that do charge income tax but do not have a 529 state tax deduction: California, Hawaii, Kentucky, and New Hampshire. There are no federal tax deductions for a 529 plan, but some states offer deductions for in-state plans.
There shouldn't be any federal taxes or penalties as long as the new beneficiary is a qualified family member of the current beneficiary. So, if your child opts out of college, you can name a younger sibling or even a niece or nephew or potentially another relative.
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.
There are two major advantages to 529s. First, unlike a Roth IRA or 401(k), you can contribute as much as you like until you meet a specific balance (often $400,000). Second, you won't be taxed on your investments as they grow. And finally, you can withdraw money tax-free.
The new rules for 2024, however, that will enable account holders to transfer up to $35,000 of unused 529 savings to a Roth IRA retirement account for their child may put some families' minds at ease and encourage more parents to maximize tax advantaged tools for college savings.
Can I roll my 529 to a Roth?
It works like this: Starting in 2024, you can roll unused 529 assets—up to a lifetime limit of $35,000—into the account beneficiary's Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income.
With the new regulations, which go into effect in 2024, 529 plan account owners or beneficiaries can roll over 529 funds into a beneficiary-owned Roth IRA owned tax-free and penalty-free.
You know the saying, “It's never too late…” Truly, it's never too late to save for your child's college education in a 529 plan, even if it's their senior year of high school. Why? 529 plans offer many benefits to enhance the growth of funds placed aside for future college costs—even if the future is 2021.
529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.
529 plans do not have specific withdrawal deadlines. A 529 plan account owner is not required to take a distribution when the beneficiary reaches a certain age or within a specified number of years after high school graduation, and funds can remain in the 529 plan account indefinitely.
What Happens to 529 Money When a Child Turns 21? 529 accounts owned by parents stay in the parents' control so long as they'd like.
Individuals can put up to $85,000 into a 529 plan over a five-year period while still having that money excluded from the gift tax. Married couples filing jointly can do the same for up to $170,000. However, they'd need to put a hold on making further contributions for five years.
Grandparents can open their own 529 accounts for grandchildren or contribute to parent-owned accounts, but owning your own account can provide tax benefits. Money in a grandparent-owned 529 plan doesn't count against the grandchild's eligibility for need-based financial aid on the FAFSA.
While a 529 owned by a grandparent (or other third party) for the student's benefit has never been reported on the FAFSA, a withdrawal will no longer be considered untaxed income the student receives, meaning it will not negatively affect student aid.
Parent-owned 529 plan assets are reported on the FAFSA as parent assets. Parent assets can only reduce aid eligibility by a maximum of 5.64% of the account value. On the other hand, grandparent-owned 529 plans were not reported as assets on the prior FAFSA at all, which would seem to have made them more attractive.
Is there anything better than a 529 plan?
#1 – Coverdell Education Savings Accounts (ESAs)
Another benefit is that this type of savings account offers a wider range of investment options than a 529. While many 529s limit investments to mutual funds, Coverdell ESAs typically allow an investor to also invest in individual stocks and bonds.
Pros of Using a Roth IRA for College
You can choose your own investments and manage your own portfolio. By contrast, a 529 plan is much more limited in its investment options, and you have much less control over the portfolio. Greater flexibility.
Tax benefits and a new Roth IRA feature make 529 college savings plans attractive, but they're not a one-size-fits-all option. There are many different approaches to saving for college, but 529 plans are used by more Americans than any other option — 30% of Americans use a 529 plan.
Your 529 can be used for student loan repayment up 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.
You may use a single 529 plan account to save for more than one child if you, as the account owner, change the beneficiary when it's time to pay for your next child's college expenses — at no cost. Usually, having a separate 529 for each child makes sense, but some parents prefer a single plan.
