TL:DR

• What is a 529 Plan?

• Changes to 529 plans

‘How do I start investing for my kids?’ ‘What are the best investment accounts for my kids?’ These are some of the most common questions that we receive. There are so many choices and the differences between each can often be confusing. So, which one should you choose?

What are 529 Plans?

You are probably most familiar with 529 accounts or UGMA/UTMA accounts and if not, 529 college savings plans are designed for post-secondary educational expenses with additional exceptions, while UTMA accounts are investment accounts where the funds can be used for any reason. We covered the pros and cons of each in detail here as well as in our free class so you can make an informed decision before you choose.

But, have you heard that new changes to 529 plans are coming?

529 investment accounts are great planning vehicles for your kids who plan to attend a post-secondary institution.

Currently, if a child or teen does not use the 529 funds for eligible educational expenses, the account holder can transfer the funds to another qualifying family member to use for eligible educational expenses while still avoiding any tax penalties.

Changes to 529 Plans

However, starting in 2024, 529 account holders are now able to roll over any unused funds into a Roth IRA which is a great alternative!

Unfortunately, there are some restrictions based on what we know as of today:

1. The 529 account must be open for at least 15 years.

2. There is a $35,000.00 lifetime cap on transfers.

3. You are still subject to the Roth IRA contribution limit (the contribution limit is $6,500 for 2023).

4. You cannot rollover earnings or contributions made in the 529 in the last 5 years.

5. Funds can only be rolled over into the 529’s beneficiary’s Roth IRA. So for example, if the 529 is in your child’s name, the Roth IRA must also be in your child’s name.

(To have a Roth IRA, your child must also have proven earned income - we shared more about opening retirement accounts for your child here.)

This new change is a great alternative for the child’s investment to still reap the continued benefits of compound interest in the event that they may receive scholarships or grants and no longer need the funds being held in the 529 account or decide to not pursue a post-secondary education all together.

So, whether you choose a 529 plan or UGMA/UTMA for your child (or both) just know that neither is better, but each investment vehicle can be a great option depending on you and your child's goals for the future.

Below are a list of 529 accounts for your child by state:

Open the right 529 account for your child.

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