529 College Savings Plan
A state-sponsored tax-advantaged investment account for education expenses, with tax-free growth and tax-free withdrawals for qualified education costs.
Detailed Explanation
529 contributions are not federally deductible but most states offer a state income tax deduction or credit (subject to caps and in-state plan requirements in some states). Withdrawals for qualified education expenses (tuition, fees, books, room and board, and up to $10,000 per year of K-12 tuition) are tax-free. SECURE 2.0 added the option to roll up to $35,000 lifetime from a 529 into a Roth IRA for the beneficiary, subject to the 15-year account age requirement and annual Roth contribution limits.
Key Points
- No federal deduction, but most states offer a state income tax deduction or credit for contributions.
- Growth is tax-free and withdrawals for qualified education expenses are tax-free.
- Qualified expenses include college tuition, fees, books, room and board, and up to $10,000/year of K-12 tuition.
- SECURE 2.0 allows rolling up to $35,000 lifetime from a 529 to the beneficiary's Roth IRA (15-year account age rule).
- Non-qualified withdrawals are taxed on the earnings plus a 10% penalty.
Practical Example
Parents contribute $10,000 a year to a 529 for their child. The account grows tax-free and they later withdraw $40,000 for college tuition with no federal tax on the earnings. If $10,000 remains unused, under SECURE 2.0 they can roll it to the child's Roth IRA (subject to the annual Roth limit and 15-year account-age rule) rather than taking a taxable non-qualified withdrawal.
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Learn about Tax Planning & StrategyRelated Terms
SECURE 2.0 Act
A 2022 federal law amending retirement account rules, including RMD age changes, expanded catch-up contributions, automatic 401(k) enrollment, and new employer matching for student loan payments.
Backdoor Roth IRA
A two-step strategy of contributing to a non-deductible traditional IRA and converting it to Roth, used by high-income earners who exceed direct Roth IRA contribution limits.
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