Baby Talk: 529s!

Nicole Mongeon, CFP® |

There are about one million things to figure out when you’re expecting: daycare, healthcare, selfcare… it can be challenging mix of anxiety and excitement. 


However, being a student of financial planning meant I’ve always known one of the first things to do once baby Henry made his debut: open a 529! 


John covered many of the tax advantages to the 529 Plan in his blog here, but to summarize:

  • Contributions grow tax-deferred and can be withdrawn federal and state tax-free as long as they are used for qualified higher education expenses
    • Qualified higher education expenses range from tuition to books to room and board – more details can be found here
  • State income tax deductions for contributions
    • These vary by state, in Virginia you can currently deduct $4,000 per account per year with unlimited carryforward – those age 70 and above may deduct the entire amount contributed with no limit
  • Special 529 rules allow a gift giver to make a lump sum contribution of up to five times the annual gift tax exclusion amount and spread it over five years
    • For 2023, the annual gift tax exclusion amount is $17,000 so this means a married couple could fund up to $170,000 ($17,000 x 5 x 2) tax free
  • 529 Plans owned by grandparents are not included on the FAFSA (Free Application for Federal Student Aid) and distributions will no longer need to be reported as income for the student (great news for those seeking financial aid!)
  • 529 Plans owned by parents do count as a parental asset on the FAFSA but the reduction of financial aid is quite minimal compared to the tax-free investment gains you earn


BUT WAIT! Now, thanks to recent legislation, there is one more very important advantage that has made the 529 Plan even more powerful.  Starting in 2024, 529 Plan account owners will be able to roll over unused 529 funds into Roth IRA accounts.  This means that even if little baby Henry decides higher education is not for him (Mom doesn’t love that) or doesn’t use all the assets in his 529 because he’s so brilliant he received a hefty scholarship (Mom DOES love that), he can roll his 529 funds to a Roth IRA! 


Of course, there are several rules to completing the rollover.  They include:

  • The 529 account must have been open for more than 15 years
  • The rollover amount must have been in the 529 for at least 5 years
  • The annual rollover limit is subject to Roth IRA annual contribution limits
  • There is a lifetime rollover limit of $35,000 for each 529 account beneficiary


Regardless, this powerful savings vehicle got a major upgrade and we are excited to start saving for baby Henry’s future!


Sources: Internal Revenue Code Section 529;

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