Get To Know Section 529 College Savings Plans
/A Code Section 529 College Savings Plan is a tax-advantaged, state-sponsored investment account to save money for a beneficiary to pay for qualified education costs, including college, K-12, and apprenticeship programs. The investment account is tax-advantaged because it offers tax-free withdrawals when used to pay qualified education expenses. Because it is state sponsored, each state has their own version of the 529 savings plan with their own set of rules. Some state rules run in conjunction with the federal rules, but some may not.
You are not limited to owning a 529 Plan in the state in which you reside. However, most states offer tax incentives, either as a tax credit or as a deduction, for the contributions of their residents. The beneficiary is not required to live in the state in which their plan is located, nor are they required to attend college within that state.
Some general rules for 529 Plans include being subject to the gift tax exclusion. Each year, the IRS allows each taxpayer to gift a certain amount to a recipient without requiring it to be reported on a gift tax return. For 2024, that amount is $18,000. For 529 Plans, contributions are allowed to fund five years in one year, or $90,000 per taxpayer, subject to no additional contributions for those five years. Note, state incentives are usually on an annual basis.
Effective in 2024, Section 529 of the federal Code was revised to allow rollovers to a Roth IRA for the Account’s Beneficiary. To meet the requirements: the account must have been maintained for at least the 15-year period ending on the rollover date; the rollover cannot exceed the total amount contributed to the Account, plus earnings on those contributions before the 5-year period ending on the rollover date; the lifetime limit on the rollover is $35,000; and, it cannot exceed the Roth annual contribution limit ($7,000 in 2024). States may require recapture of tax incentives.
Specifically for Indiana, tax credit recapture exists for K-12 out-of-state tuition and the Roth rollover. Effective for 2023, the contribution deadline has been revised to the due date of the income tax return (April 15, adjusted for weekends and holidays) for the immediately preceding tax year prior to any extension. To do so, an election must be made to treat the contribution as made in the previous year.
- Pam Smitson, CPA, CGMA, Smitson Erhart-Graves Financial Advisors
