Saving for Higher Education with a 529 Educational Savings Plan

Whitener Capital Management |

529 Educational Savings Accounts

What are 529s? 

529 plans are tax advantaged savings plans designed to help pay for educational expenses from kindergarten through graduate school. These plans are sponsored and run by the 50 states and the rules and fees differ by state. The funds in a 529 grow on a tax-deferred basis and are tax penalty free when withdrawn and used for qualified expenses. 


Who can open 529s?

Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of their child or grandchildren, who is the account’s beneficiary. In some states, the person funding the account may be eligible for a tax deduction.   


How are 529s invested? 

The account holder contributes money to the plan and the funds are then invested in a preset selection of investment options. Many 529 plans offer target-date funds which adjust their assets and become invested more conservatively as the beneficiary gets closer to college age.


How are withdrawals taxed?

529s have several tax benefits. Contributions to 529s are tax free, along with tax-deferred growth. When funds are withdrawn for qualified education expenses, they are tax-deferred as well. 


What expenses are considered qualified?

Funds withdrawn from a 529 savings plan can be used for both college and Kindergarten through 12th grade education expenses. Those qualified expenses include: tuition, fees, room and board, and related costs. The SECURE Act also allows tax-free qualified student loan debt repayment, up to $10,000. 


What happens to the funds if they aren’t depleted?

The SECURE Act of 2022 passed a rule permitting unused 529 funds to be rolled over into a Roth IRA account. The lifetime rollover limit is $35,000, which can be contributed to an IRA annually within the annual contribution limits (2024 limit is $7,000). 


Opening up a 529 Education Savings plan is a great tax advantaged way to save for educational expenses for your loved ones. Whether you’re a parent, grandparent, or guardian, starting to save early is a valuable way to effectively plan for your children or grandchildren's educational future.