Tax Tips
The 529 Plan Strategy: Tax-Free Education Funding and the New Roth Rollover Rule
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Result: The 529 Plan creates $40,000 in additional purchasing power.
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The 529 Plan Strategy: Tax-Free Education Funding and the New Roth Rollover Rule
CORE INSIGHTS
- Ultimate Tax Shelter: 529 Plans offer tax-free growth and withdrawals for education expenses.
- The Safety Net: Secure Act 2.0 allows up to $35,000 of unused funds to rollover to a Roth IRA tax-free.
- Estate Planning: You can “Superfund” 5 years of contributions at once to remove assets from your estate immediately.
The 529 Plan has evolved. It is no longer just for college. With the new Roth rollover rules, it has become a powerful multi-generational wealth transfer vehicle.
What-If Scenario: Taxable vs. 529 Plan
| Account Type | Tax Treatment | Net Result |
|---|---|---|
| Taxable Brokerage | Capital Gains Tax | ~$310,000 |
| 529 Plan | Tax-Free | ~$350,000 |
Visualizing the Tax Advantage
*Figure 1: After-Tax Wealth Comparison over 18 Years.*
Strategic Action Steps
1
Open Early
Start the 15-year clock immediately. The Roth rollover option requires the account to be open for at least 15 years.
Start the 15-year clock immediately. The Roth rollover option requires the account to be open for at least 15 years.
2
Check State Benefits
Always check if your state offers a tax deduction for using their specific plan. If not, choose a top-tier plan (e.g., Utah/Nevada) with low fees.
Always check if your state offers a tax deduction for using their specific plan. If not, choose a top-tier plan (e.g., Utah/Nevada) with low fees.
3
Superfund It
If you have the capital, contribute 5 years’ worth of gifts ($90k per individual) at once to maximize tax-free compounding.
If you have the capital, contribute 5 years’ worth of gifts ($90k per individual) at once to maximize tax-free compounding.
The Bottom Line: Who Should Choose What?
- Choose 529: Families who want tax-free growth and have the flexibility of the Roth rollover backup plan.
- Choose Brokerage: If you are 100% certain the money will NOT be used for education or the child’s retirement.
Frequently Asked Questions
What if my child doesn’t go to college?
Unused funds can roll to a Roth IRA (limit $35k, account must be 15 years old) or be transferred to another family member.
Is the 529 contribution tax-deductible?
Not federally, but over 30 states offer a state income tax deduction or credit for contributions.
What can 529 funds be used for?
K-12 tuition ($10k/yr), college tuition, room & board, books, and student loan repayment ($10k lifetime).
Disclaimer: Informational purposes only. Consult a professional.