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A 529 plan is a state-sponsored, tax-advantaged savings plan designed to help families save for education expenses. Contributions are made with after-tax money, but the funds grow tax-free, and qualified withdrawals are also tax-free. Some states even offer tax deductions or credits for contributions.
Key Benefits & Recent Expansions (The “One Big Beautiful Bill Act“)
Recent legislation significantly broadens the utility of 529 plans, making them more versatile than ever before:
- Tax-Free Growth & Withdrawals: Your savings grow free from federal taxes, and withdrawals for qualified education expenses are tax-free.
- Expanded Qualified Expenses:
- K-12 Education: Now includes up to $20,000 annually per beneficiary (previously $10,000) for tuition, curriculum, books, online resources, tutoring, and educational therapies for students with disabilities. This is particularly beneficial for homeschool families.
- Workforce Development: Covers tuition, materials, and fees for certificate programs, trade schools, and other federally recognized credentialing programs.
- Standardized Testing: Fees for standardized tests are now qualified expenses.
- Dual Enrollment: Fees for college courses taken in high school are included.
- Roth IRA Rollover Option: Up to $35,000 in unused funds can be rolled into a Roth IRA for the beneficiary under certain conditions, offering a valuable long-term savings option if education plans change.
- Beneficiary Flexibility: You can change the beneficiary to another qualified family member if needed.
Important Considerations & Potential Drawbacks
While 529 plans offer significant advantages, they may not be suitable for everyone:
- Limited Investment Choices: Most plans offer a restricted selection of mutual funds, often age-based target funds, which might limit potential earnings growth compared to a broader market index or individual stock investments.
- Financial Aid Impact: Funds held in a 529 plan are considered an asset on the Free Application for Federal Student Aid (FAFSA) and can modestly reduce eligibility for need-based financial aid.
- State-Specific Rules: While federal law governs tax-free growth, specific state tax benefits and what qualifies for a state-level deduction/credit can vary significantly. Some states may still tax withdrawals for K-12 expenses even if federally qualified.
- Rigid Rules: Despite expansions, there are still caps and specific requirements on how funds can be used (e.g., a $10,000 lifetime cap for student loan repayments).
- Awareness: It’s possible for beneficiaries to be unaware a 529 plan has been opened for them, leading to unused funds.
529 plans, especially with recent expansions, are powerful tools for saving for a wide range of educational and career development expenses. However, their suitability depends on individual circumstances and financial goals.
At Intelligent Investing, a boutique wealth management firm, we specialize in serving high-net-worth individuals and families, providing tailored financial guidance. We are committed to our core values, encapsulated by the acronym CLIENT: Compassion, Legacy, Integrity, Excellence, Nimbleness, and Truth. We encourage you to contact us to discuss how a 529 plan or other strategies can best fit into your comprehensive wealth management strategy. Learn more at investedwithyou.com.
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