Other advantages of the 529 plan
The grandparent loophole and Roth IRA rollover are just the latest benefits added to the 529 plan, which Scarlata says is her favorite education savings plan.
“It’s the plan you can contribute the most amount, get tax-free growth and withdrawals and some in-state tax benefits,” she said. Other advantages include:
● Contributions aren’t tax-free on a federal basis, but withdrawals are tax-free for qualified expenses like tuition and fees, books and other supplies or up to $10,000 annually for K-12 tuition.
● Most states will give you a tax break for contributions if you invest in the state’s 529 plan. Check your state’s rules.
● A handful of states offer “tax parity,” which means you can deduct at least some of your contributions to any plan in the United States, not just the one provided by your state.
● Contributions are considered gifts. For 2024, the annual gifting limit is $18,000 for an individual or $36,000 for married couples, so you can contribute up to that amount in a 529 without incurring the IRS’ gift tax. That amount is per beneficiary so parents, grandparents and others may gift that much annually to each student.
● “Accelerated gifting” allows you up to five years of gifting in a 529 in one lump sum of $90,000 for an individual or $180,000 for a couple. If you can afford it, this allows the full amount to grow tax-free longer.
● You can invest contributions and allow the balance to grow tax-free. Despite this benefit, Scarlata said about half of Americans keep their money in cash and cashequivalents like certificates of deposit (CDs) or savings accounts. With college tuition rising about 8% annually, keeping those types of assets in your 529 isn’t going to help you pay for college, she said. The broad-market S&P 500 stock index, on the other hand, returns 10% annually on average, giving you a shot at ramping up your savings.