Great news: As of 2024, you can transfer the unused money in your 529 account into a Roth IRA on behalf on the beneficiary (wahoo!) The government’s new SECURE 2.0 Act has some of us popping champagne, and others wondering, what the heck is this? 

If you’re a parent or plan on having kids one day, this post is a healthy wallet must-read. In here we’ll cover: 

• What is a 529 account? 
• What are the different 529 account types? 
• Should I open a 529 account? 
• How much can I contribute to a 529 account? 
• Is a 529 account bad for you? 

Get ready to celebrate with us, current and aspiring mammas! Once you’re done reading, you’ll be closer to feeling like a 529 account pro. 

(And if you need “family planning” help with all things money, remember Penny’s got your back! We’re here to be your digital financial mentor and biggest cheerleader. Join us today.)

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What is a 529 account?

A 529 account is a way to save money for your children’s future education, with added tax benefits: the money you withdraw to cover costs is tax-free.

Eligible expenses are always tax-free at the federal level – and sometimes, state level too. They include things like tuition, required books, and even electronics, if it’s required by the course or institution your child’s at. (Great way to cover their new laptop!)

There are 2 types of 529 accounts: 

• General savings plan, which you can use at any qualifying college or institution.
• Prepaid tuition plan, which allows you to “lock in” the tuition rate at a public institution. 

As you can probably guess, the general plan gives you more flexibility, so it’s the popular choice. 

From these, you can also choose HOW to distribute the money with an Individual vs. Custodial 529 account. 

• An Individual 529 Account is the most common plan. As an individual, you control this account regardless of your child’s age (or the age of whoever you’re saving for). Since you’re the one calling the shots, you can also change the beneficiary at any time – which is helpful if you’re saving for more than one person, or have other young relatives you’d like to support. 
• A Custodial 529 Account is slightly different. Essentially, this account is for your child only. Your 529 contributions are considered a “gift” and the money is “in custody” until they reach adult age (often between 18-21 years old). Once they’re old enough, the money is theirs (and theirs alone) to use for their education. 

Now that you have a general idea, you might be wondering: should you open a 529 account for your kids? Keep reading! 

Should I open a 529 account?

You should consider opening a 529 account if: 

• you plan on having kids, or have young children
• you value education
• you can afford to (more on this later)

A 529 account is a great way to save for your kids’ future education. But that’s not the only thing that makes it so delicious for your savings. 

Similar to retirement accounts, you can invest the money you contributed to a 529 – and grow it tax-free!

With a 529 plan, you can choose an investment plan to match your financial goals, and watch your money grow. (And it will, because investment returns are better than any good-ol’-shabby savings account.)

If you need help with investing or financial planning, we can help you create a money plan tailored just for you. 

Here are another 3 great reasons to open a 529 account: 

1. You can earmark up to $10,000 for K-12 school years. Most think of the 529 account as a “college savings plan” – but it’s not limited to college or university education. And again, this $10k (as an eligible tuition withdrawal) is tax-free. 
2. You don’t need to live, contribute to a 529, AND study in the same US state. You’re allowed to live in Maine, contribute to a 529 in Florida, and cover education costs in New York. Each US state offers different 529 advantages based on their taxes and laws, so it’s a plan worth shopping around for.  
3. It’s a great way to put money aside for your children’s future, period. A 529 pairs well with other family savings plans and accounts. Most offer auto-pay, so you can easily transfer directly from your income without worrying about whether you’ve contributed that month or not. One less thing off your to-do list is always a win in our book! 

What if you’re in debt? 

You don’t need to wait until you’re debt-free to start contributing to a 529 account. You can start with small amounts, then increase when you can. There’s a balance. 

With Penny, you can estimate how long it’ll take for you to be debt-free, and what your actual minimum payment should be to pay it off sooner. 

Take the money quiz. 

If you don't feel financially ready for the commitment of contributing to a 529 account, that’s okay! 

You can hold off for now, or find an alternative that works for you (like adding more money into a high-interest savings or Roth IRA). But first, you gotta know your numbers to make the best decision for you and your kid’s future.

How much can you contribute to a 529 account? 

You can save a hefty amount in a 529 account!

• Each parent can add up to $16,000 (aka $32,000 per couple).
• Grandparents can also chip in: up to $32k per person, per year. 
• If you decide to contribute more than $16k per person, you can, but you need to report it to the IRS. 

You can also choose to “superfund” your 529 account (max $80k per person, or $160k per couple) by using up your federal gift-tax exclusion for up to 5 years. 

Head’s up: Superfunding is ONLY IF it makes sense for your financial picture. Otherwise, unless you’ve become extra-savvy with 529 lingo and taxes, we wouldn’t recommend it. 

You’re probably better off contributing into a Roth IRA instead to make up for potential gaps in your kid’s school budget. 

Is a 529 account bad?

No! Misunderstood, maybe. 

The 529 account gets a bad rep for 2 reasons: 

1. Money is locked in for education expenses only. 

Sounds great on paper, but tricky in practice! How do you know how much money your child will (actually) need? What if you contribute too much, and now it’s locked in? 

Great news: If you have another kid in the family (including a niece/nephew) you can add them as a beneficiary instead, or roll leftover cash into a different 529. 

As mentioned earlier, now you also have the option to move your 529 money into a Roth IRA account thanks to the SECURE 2.0 Act. So, once all kiddos have graduated, you can start a retirement for them.

2. Not all “education expenses” qualify. 

Although there’s a surprising amount of expenses you can (and should) include, there are also things that don’t qualify. For example, you can use a 529 to pay for required electronics (like a laptop), but you can’t apply it for gas or parking costs from driving to school.

Great news: The rules are straightforward. Once you learn the ins and outs of what’s allowed, it’s easy to navigate. Just remember to save all receipts and keep detailed records, so you can easily back up your eligible expenses with proof if needed. 

Bottom line…

Overall, a 529 account is a great way to save for your children’s future education. There are lots of rules to watch out for, but it’s worth it once you learn the ropes. 

The 529 allows you to: 

• Save at least $16,000 per year or more for your kid’s future ($16k per person, $32k for couples, plus $32 for grandparents)
• Create an investment plan and grow your money (tax-free!)
• Cover most college costs, including up to $10k per year for K-12 education

Plus, thanks to the government’s new SECURE 2.0 Act, you can now transfer unused 529 funds into a Roth IRA account starting in 2024 – and continue to set the kids in your life up for financial success! Here’s to more rules changing and more win-wins all around.

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