529 plans can be an excellent tool to help defer higher education expenses. But you must use them carefully because holding assets as beneficiaries could impact their eligibility for financial aid.
Transferring a 529 account can be done, but be aware that it won’t be tax-free and fees should also be taken into consideration.
Taxes
Rollover 529s can be beneficial, but it’s essential to carefully consider their tax repercussions before doing so. For instance, changing beneficiaries could result in income taxes and penalties of 10% plus another 10 percent penalty being assessed against you. Also check local state regulations, as some may require recapture of state tax deductions on earnings from a rollover.
However, by switching the beneficiary of an education tax deduction-eligible family member you could potentially avoid taxes altogether. Eligible beneficiaries include siblings of original account owner’s siblings or parents as well as spouse, children, grandchildren and first cousins as eligible beneficiaries – generation-skipping rules may also apply in some instances when making transfers between accounts of different generations – but be sure to consult a tax advisor first as your decision may have gift or estate-tax consequences depending on your personal circumstances.
Fees
If you own a 529 account, beneficiaries can be changed as often as once every twelve months without incurring taxes; however, any subsequent rolls over may incur taxes on earnings portion of distribution; this also holds true for Coverdell Education Savings Accounts (CESAs).
While most people use their 529 accounts for college savings, you can use them in other ways too. One such use would be investing in stock funds with this strategy giving the potential for outsized returns that far surpass savings accounts in general.
Beginning in 2024, you may also convert your 529 assets to a Roth individual retirement account (Roth IRA). Although this change could incur some tax implications, it can help maximize returns and help avoid penalties of 10% when distributions are not used for qualified educational expenses.
Withdrawals
529 plan withdrawals may be tax-free when used to cover qualified expenses; otherwise they’re subject to income taxes and a 10% penalty tax if used for non-qualifying expenses instead. Furthermore, you may have to reimburse state income tax deductions you claimed on withdrawal. It is wise to consult a CPA or fiduciary financial advisor before taking any actions related to withdrawal.
Switching the beneficiary of a 529 account may help avoid penalties; however, be mindful as doing so could have tax and gift implications. Furthermore, be sure that they meet eligibility requirements per the plan rules before making this change.
Another option is to convert your 529 into a Roth IRA, enabling tax-free withdrawals at retirement. But remember, this may result in some loss of investment gains; therefore it is vital that receipts for expenses be kept to prove eligibility when withdrawing withdrawals are tax-exempt.
Investment options
A 529 plan can be an ideal way for families looking to save for a child’s education, since its investment earnings are tax-free provided the funds are used on qualified educational expenses like tuition fees and books. Plus, this account can fund a variety of opportunities like private elementary/secondary schools, apprenticeships or home schooling programs!
There may be issues associated with 529 accounts that could arise; one being that should your child decide against attending college and no longer needs all the money saved in it, they’ll owe income tax as well as an additional 10% penalty when withdrawing funds for non-qualified expenses.
Avoid this dilemma by moving funds into a Roth IRA, an individual retirement account that allows you to invest post-tax dollars. There are numerous Roth IRA options available so you can select one suited to your investment goals and risk tolerance.
