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Important Financial Planning Highlights & Hidden Gems for 529 College Savings Plans

1.  Tax Advantages

• Tax-Free Growth: Earnings grow without being taxed.
• Tax-Free Withdrawals: Withdrawals are tax-free when used for qualified education expenses.
• State Tax Benefits: Some states offer tax deductions or credits for contributions.

2.  Qualified Educational Expenses

• Education Costs: Funds may be used for tuition, fees, room and board, books, computers, software, and internet access at accredited institutions.
• K-12 Expenses: Up to $10,000 per year can be utilized for K-12 tuition for public, private, or religious elementary, middle, and high school tuition.
• Student Loans: Up to $10,000 lifetime limit can be utilized to repay student loans.

3.  Flexibility in Use

• Change of Beneficiary: You can change the beneficiary to another qualifying family member without tax penalties.

4.  Investment Options

• Choice of Investments: For college savings plans, you can select from various investment portfolios, including age-based options that adjust as the beneficiary nears college age.

5.  Ownership and Control

• Account Owner: The account owner maintains control over the funds, and decides when funds are utilized to pay for qualified education expenses. 

6.  Impact on Financial Aid

• Consideration in Financial Aid: 529 Plan assets are generally considered in financial aid calculations, but they are less impactful compared to assets held in the student's name.

7.  Penalties for Non-Qualified Withdrawals

• Taxes and Penalties: Withdrawals not used for qualified education expenses are subject to income tax and a 10% penalty on earnings.  There are some exceptions to the 10% tax penalty including receipt of education tax credits, receipt of scholarships, or attending a U.S. Military Service Academy.

8.  NEW Rollovers to Roth IRA Retirement Plan Accounts

• Effective January 1, 2024:  The new SECURE ACT 2.0 regulation allows tax-free and penalty-free rollovers to Roth IRA accounts for individuals with excess funds in a 529 Plan.
• Annual Contribution Limits:  The rollover amount is subject to IRS annual contribution limits, and the beneficiary must have earned income equal to the amount transferred into the Roth IRA.
• $35,000 Lifetime Limit:  There is a lifetime rollover limit for each 529 Plan beneficiary, and the entire amount cannot be rolled over in one year.
• 15-Year Account Existence Rule:  The 529 Plan account needs to have existed for at least 15 years to qualify for the rollover. 
• 5-Year Rule on Contributions & Earnings:  The law also includes a quirky rule which indicates any contributions and earnings on those contributions made within the past 5 years cannot be rolled into a Roth IRA.