Inspired by National 529 Day, many families think about college savings during the month of May and seek to learn more about 529 plans.
With the rising costs of a college education, most families recognize the importance of starting early to save for college. The structure of a 529 plan is conducive to building savings and millions of families use these plans as part of their overall saving strategy. There are also many considerations for account owners looking to optimize 529 savings as part of their tax planning.
Still, there are many savers who may not realize the full range of benefits that 529 plans may provide.
A recent 529 Month webinar hosted by Franklin Templeton Wealth Planning focused on how 529 plans are used, the impact on federal financial aid, and expanded uses.
Here are some of the leading 529 questions addressed during the webinar.
Qualified expenses
How long does money need to be held in the account before withdrawing for K-12 tuition? Could money be added throughout the year for use during the following year?
There is no requirement for how long funds must be held in a 529 before making a distribution for K-12 tuition. For a withdrawal for K-12 tuition to be considered qualified, there is a limit of $10,000 per year. Also, a number of states do not recognize K-12 tuition as a qualified expense for state income tax purposes. This means that there could be adverse state tax implications if you are a resident of one of those states and take a distribution to pay for K-12 expenses. Consult with a tax professional for guidance.
Can 529 plans be used to pay for tutoring?
Unfortunately, tutoring is not considered a qualified expense.
Transferring 529 funds to a Roth IRA
Can you make an IRA contribution in the same year that funds are transferred from a 529 to a Roth IRA?
The transfer from a 529 to a Roth IRA is considered a contribution for that year subject to the current limit of $7,000 ($8,000 if age 50 or over). For example, if you transfer $7,000 from a 529 to a Roth IRA, you would not be able to make a separate $7,000 IRA contribution.
Can an individual change the beneficiary of a 529 account to another sibling (or parent) and then transfer funds from the 529 to a Roth IRA in the name of the new beneficiary?
One of the requirements for a 529 to Roth transfer is that the 529 account must be established for at least 15 years. This prevents a higher-income individual from funding a 529 as the owner and beneficiary, and then immediately transferring funds to a Roth IRA to avoid the income eligibility restrictions on making a Roth IRA contribution.* At this point, it is unclear if a change in 529 beneficiary would prompt a “reset” of the 15-year clock requirement. 529 plan providers and industry groups are requesting additional guidance from the IRS.
*For 2024, modified AGI is less than $146,000 (single) or $230,000 (married/filing jointly); phaseouts apply if modified AGI is $146,000–$160,999 (single) or $230,000–$239,999 (married/filing jointly).
Does the portion transferred from a 529 to a Roth IRA consist of 529 account contributions only (i.e. “basis”) or a pro-rata portion of contributions and account earnings?
It is not completely clear, but distributions from 529 accounts for qualified or non-qualified distributions consist of a pro-rata portion of contributions and earnings. It is likely that a 529 to Roth transfer would follow these same rules unless the IRS provides further guidance.
529 plans and the impact on financial aid
How are grandparent-owned 529 accounts treated from a federal financial aid perspective?
When completing the Free Application for Federal Student Aid (FAFSA), a 529 owned by a grandparent is not considered as an asset for purposes of calculating financial aid (up to 20% of student assets are considered and up to 5.6% of certain parent assets are considered as part of the calculation). Additionally, due to recent changes in the federal financial aid application, distributions from grandparent-owned 529 accounts are not considered as income to the student as part of the FAFSA income test for determining aid. Therefore, distributions from a grandparent-owned 529 will not impact eligibility of aid on a subsequent FAFSA application.
Certain colleges require that the CSS-Profile be completed when applying for financial aid. Depending on the institution, different rules may apply with respect to reporting assets, including 529 accounts owned by grandparents for example, as part of the filing. See the College Board for more information on the CSS profile (collegeboard.org).
Would it be favorable for financial aid if the student beneficiary is listed as the owner on their 529 account?
For federal financial aid purposes, the 529 account owned by a dependent student would be treated the same as an asset of the parent so there would be no special benefit from a financial aid perspective. Note that other assets owned by the student (savings accounts, custodial UTMA/UGMA1) may be treated less favorably on the FAFSA asset test than assets owned by the parent.
Ownership-related considerations
If the 529 account owner passes away, can the beneficiary assign the funds to another individual as owner?
Generally, when a 529 account owner passes away, the ownership of the account would pass to a successor owner named on the account application. The beneficiary would not be able to assign someone new. Some state plans may have different rules based on their specific 529 plan document.
If funds from a custodial account (UTMA, UGMA) are transferred into a 529 account, can the beneficiary be changed to another person before the child reaches the age of majority?
Contributions made to custodial accounts are considered completed gifts to that recipient. Therefore, an account owner cannot change the beneficiary on funds transferred to a 529 that originated from a custodial account. See our article, “Consider a reset of college savings with a 529 plan.”
Seek advice
When considering a new savings plan or changes to your financial plan, it is important to seek advice from a financial advisor familiar with your situation.
Explore Franklin Templeton’s resources and learn how a Franklin Templeton 529 plan can help you invest for your child’s education.
For more information, speak with your financial professional.
WHAT ARE THE RISKS?
All investments involve risk including possible loss of principal. Diversification does not guarantee a profit or protect against a loss.
Investors should carefully consider the 529 plan’s investment goals, risks, charges and expenses before investing. To obtain the Program Description, which contains this and other information, talk to your financial professional or call Franklin Distributors, LLC, the manager and underwriter for the 529 plan at (800) DIAL BEN/342-5236 or visit franklintempleton.com. You should read the Program Description carefully before investing and consider whether your, or the beneficiary’s, home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in its qualified tuition program.
Franklin Templeton’s 529 College Savings Plan is offered and administered by the New Jersey Higher Education Student Assistance Authority (HESAA); managed and distributed by Franklin Distributors, LLC, an affiliate of Franklin Resources, Inc., which operates as Franklin Templeton.
Investments in Franklin Templeton’s 529 College Savings Plan are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of New Jersey, Franklin Templeton, or its affiliates and are subject to risks, including loss of principal amount invested. Investing in the plan does not guarantee admission to any particular primary, secondary school or college, or sufficient funds for primary, secondary school or college.
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1.The Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) are custodial accounts that allow parents to set aside assets for a minor child.
