By YBB Personal Finance
Rising college costs are on the minds of many parents and students. Planning must begin early. States’ 529 plans are great vehicles for them. Each state has a 529 plan under the federal and state laws.
The earnings grow tax-deferred and qualified withdrawals are tax-free; non qualified withdrawals are taxable, have penalties, and may have clawbacks of state incentives. 529s can be used for vocational, community college, college/university, graduate and professional education. Many 529s have state tax benefits for state residents (IL deduction $10K individuals, $20K couples); if not, people can select any other state 529 plan. Annual contribution limits apply ($18K in 2024); 5 years worth of contributions can be pulled forward (IRS Form 709 required). Parents, grandparents and others can open 529 for a beneficiary. Several states offer $50-250 incentives (IL $50) for opening new 529 accounts for newborns. SECURE 2.0 (2022) allowed limited and conditional rollover of excess 529 funds into beneficiary’s Roth IRAs, but some states may treat these rollovers as non qualified and may impose clawbacks of state incentives (IL 529 made them qualified in May 2024). 529 assets are no longer counted in the owner/grantor’s estate but there can be clawbacks by creditors.
There are complex financial aid eligibility implications. Many students may use a mix of financial aid, part-time work, 529 funds, and other savings. Recent financial aid FAFSA removed hurdles for grandparent 529. Many parents may also use UTMA, Roth IRAs and taxable accounts for funding college. For more details you can visit www.ybbpersonalfinance.proboards.com/