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3 Things to Know About New IRS Rules for 529 Savings Plans

Published: September 12, 2023

3 Things to Know About New IRS Rules for 529 Savings Plans

College Savings Month Webinar

Wednesday, September 20 | 3:00 PM ET

Learn how a 529 education savings plan can set your child or grandchild on the path to a college degree during this special edition College Savings Month webinar.

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The 529 Savings Plan has always been a great tax-advantaged college savings vehicle, but the new IRS rules make 529 plans an even more flexible, more attractive investment vehicle for parents looking to set aside money for a wide range of postsecondary educational paths. 

The new rules also make it easier for parents to wrap their arms around ambitious long-term goals and work steadily over time to reach them. Here are three major changes to be aware of:

  • 529 plan uses are expanding. If you’re the parent of a child who isn’t taking the traditional route of a four-year college or university after high school graduation, no problem! Your 529 plan can now be used to pay for certain apprenticeship programs, professional certifications, and job training in a variety of fields, including culinary arts, aviation, and financial services. Consult the U.S. Department of Labor’s apprenticeship database to determine if your child’s area of interest has a qualified program. 

  • Grandparent-owned 529s no longer factor into financial aid eligibility. When it comes to paying for college, every little bit helps, and most parents want to maximize their student’s shot at federal financial aid. Under this new rule, the balances of grandparent-owned 529 plans won’t be included on the Free Application for Federal Student Aid, or FAFSA. (Not familiar with this form? Don’t worry. If your child is headed to college, you will be soon.) 

  • IRS allowing 529-to-Roth rollovers. Parents with unused college savings in a 529 account can transfer that money to a beneficiary’s Roth IRA (individual retirement account). The lifetime maximum a parent can transfer is $35,000 per beneficiary. The change takes effect in January 2024, and the account must have been open for 15 years (with rollover funds in the account for at least 5 years). Any rollover is also subject to current Roth IRA contribution limits. This change will alleviate the concerns of those parents who were worried about overfunding a 529 account because they were unsure of their student’s post-high school plans.

The changes come as the 529 Savings Plan is more popular than ever before. American families are increasingly taking advantage of 529 savings plans to save for education. In the past five years, the number of accounts has risen from 13.3 million in 2018 to more than 16 million in 2023.*

The latest research shows that opening a 529 plan can set a family up for success. Fidelity’s 2022 College Savings Indicator found that:

  • Parents using a 529 plan have a median of $12,000 set aside for college versus a median of $10,000 for those without a 529 plan. 

  • Parents with 529 plans are on track to cover 37 percent of their college saving goals versus those without a 529 on track to cover only 22 percent of their goals.

Make the most of the new rules for 529 plans

Until recently, many parents and grandparents have been careful not to overfund 529 accounts. Now, beginning in 2024, families and others have more flexibility with these assets and can give their beneficiaries the opportunity to start saving for retirement early.

A Fellows financial advisor can help you talk through the 529 plan rule change and help you identify tax-efficient strategies to save for a loved one’s education and beyond.

Contests & Promotions:

In honor of College Savings Month, 529 plans across the country celebrate in a variety of ways, including holding promotions, contests, initiatives, and virtual events.

Visit savingforcollege.com for a list of this year’s promotions.

*According to data from the College Savings Plans Network.

Content is for informational purposes only and is not intended to be used as the sole basis for investment decisions, nor should it be construed as a recommendation or advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial situation.

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