What is the 529 loophole?

The updated FAFSA does not require students to report cash support manually. That means a grandparent-owned 529 plan will not have any impact on need-based financial aid eligibility. Some have now referred to this as the “grandparent loophole.”

What are the loopholes for 529 withdrawal?

You'll be happy to learn that there is a scholarship exception to the 10% penalty. You can take a nonqualified withdrawal from a 529 account up to the amount of a scholarship; although you will pay taxes on the earnings, you won't pay the additional 10% penalty that's imposed on a nonqualified withdrawal.

Is the 529 penalty really that bad?

What is the 529 plan withdrawal penalty? If you don't use your college savings plan for eligible expenses, your 529 plan nonqualified withdrawals may incur a 10 percent penalty and be subject to federal income taxes on the investment gains at whatever rate the IRS would normally charge.

Is it better for grandparent or parent to own a 529 plan?

529 accounts also benefit grandparents because they're incredibly flexible. For example, if the beneficiary decides not to attend college, the account owner can easily change the beneficiary at any time. Equally important is the account owner's ability to transfer ownership.

What is the 15 year rule for 529 plans?

In addition, you need to have owned the 529 plan for at least 15 years before you can roll over funds, and any contributions made in the last five years before distributions began (including any earnings) are not eligible to be rolled over.

New 529 Plan Rules

Can I roll my 529 into a Roth IRA?

Starting in 2024, beneficiaries of 529 college savings accounts are permitted to do a tax-free rollover to a Roth IRA.

What is the new 529 rule in 2024?

Starting in 2024, families can roll unused 529 plan funds to the account beneficiary's Roth individual retirement account, without triggering income taxes or penalties, as long as the 529 plan has been open for at least 15 years.

What happens to 529 when child turns 21?

Their main advantage: 529 investments grow free from federal or state tax. While originally conceived as a way to save for college, 529 plan funds can now go to a wider array of programs and institutions. There are no age limits for recipients and money can be held in the plans indefinitely.

What happens to 529 if child does not go to college?

So if your child changes their mind down the road, your savings will still be available. Effective January 1, 2024, 529 funds may be rolled over to a Roth IRA in the name of the beneficiary of the 529 plan.

Do grandparents get a tax benefit by contributing to a 529?

Grandparents can open their own 529 accounts for grandchildren or contribute to parent-owned accounts, but owning your own account can provide tax benefits.

What is the downside of 529 accounts?

Drawbacks of 529 savings plans

If you do need to withdraw funds or use them for noneducation-related expenses, you'll incur a 10% penalty and owe taxes on any investment gains.

What's a disadvantage of 529 plans?

Limited control on how money gets invested

If you're interested in investing on your own without the help of an advisor, a 529 plan may not be right for you. 529 plans don't allow for self-directed investments, meaning you don't get as much control over what you're investing in.

What are the worst 529 plans?

Does IRS track 529 withdrawals?

The IRS Knows All

In any year you withdraw money from a 529 Plan, you will receive a tax document from the 529 Plan provider (Form 1099-Q). That means you cannot sneak one by on your tax filing. If some or all of the amounts withdrawn are taxable, you will have to report it on your 1040.

Can the IRS take your 529?

The short answer is yes. The Internal Revenue Service can go after the money that you have put aside for your children's college fund in what is known as a 529 Account.

Can you cash out a 529 plan?

You can call your plan administrator, make a request online, or submit a withdrawal request form. The plan can send withdrawals by check to the account owner, the beneficiary, or the school. You can transfer the money to yourself or the beneficiary electronically and then make payment to the school.

Is a custodial account better than a 529?

Custodial accounts can have a heavy impact on financial aid. Because the money in a custodial account is your child's asset and not yours, federal financial aid formulas consider 20% of the money available to pay for college. Compare this to 529 plans, which are given more favorable treatment for financial aid.

How much can you put in a 529 per year?

Unlike IRAs or 401(k)s, there are no annual contribution limits for 529 plans. However, there are maximum aggregate limits, which vary by plan. Under federal law, contributions to a 529 plan cannot exceed the expected cost of the beneficiary's qualified higher education expenses.

When should I stop contributing to 529?

529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.

How the wealthy use 529 plans?

There are two main provisions that allow the wealthy to build multi-generational 529 plans. Front-loading funding can put more money into an account quickly, while painless beneficiary changes allow that money to be used for many kids and grandkids.

Can I use my son's 529 for my daughter?

Good news—it's really easy to move money between family members—and not just between siblings. If the new recipient of the money is a "member of the beneficiary's family," as defined by the IRS, you're good to go.

Can I transfer my 529 to my daughter?

There are no tax consequences or penalties when a 529 plan beneficiary is changed to a member of the beneficiary's family. Qualified family members include the beneficiary's: Spouse. Son, daughter, stepchild, foster child, adopted child or a descendent.

What is the 5 year rule for 529 plans?

There is a special rule in the Internal Revenue Code (IRC) specifically for 529 plan contributions (and select other qualified tuition programs). It allows a gift giver to make a lump sum contribution of up to five times the annual gift tax exclusion and spread it over five years.

Can you split a 529 between siblings?

You can't have multiple beneficiaries simultaneously on your 529 account. You can, however, change beneficiaries on your 529 plan at any time. So, while you can't actively share the account between siblings simultaneously, you can share an account over time, one after another.

Can I change my 529 beneficiary to myself?

A 529 account owner can change the beneficiary at any time without tax consequences if the new beneficiary is a member of the family. A member of the family is defined in Internal Revenue Code section 529. If the new beneficiary is not a member of the family, the change will be treated as a non-qualified distribution.