529 College Savings Plans
529 plans are tax-advantaged savings vehicles specifically designed for education expenses. They're classified as municipal fund securities and require Series 6 registration to sell.
What Is a 529 Plan?
A 529 plan is a state-sponsored investment account that offers tax benefits for education savings:
| Feature | Description |
|---|---|
| Tax Status | Municipal fund security |
| Growth | Tax-deferred federally |
| Qualified Withdrawals | Tax-free for education |
| State Benefits | Many states offer tax deductions |
| Contribution Limits | No annual limit (gift tax applies) |
| Income Limits | NONE - anyone can contribute |
Types of 529 Plans
College Savings Plans
- Investment-based (similar to mutual funds)
- Value fluctuates with market
- Can be used at any eligible institution
- More flexible and popular
Prepaid Tuition Plans
- Lock in today's tuition rates
- Limited to specific state schools
- Less common, less flexible
- May not cover all expenses
Tax Benefits
Federal Tax Treatment
- Contributions: NOT tax-deductible federally
- Growth: Tax-deferred
- Qualified withdrawals: Tax-free
State Tax Benefits
- Many states offer tax deductions for contributions
- Some states offer deductions for any 529 (not just their own)
- State tax treatment varies - check specific state rules
Qualified Education Expenses
Higher Education (College)
- Tuition and fees
- Room and board
- Books and supplies
- Computer equipment
- Special needs services
K-12 Education
- Tuition up to $10,000 per year per student
- New for 2026: Increases to $20,000 per year
Expanded Qualified Expenses (2025)
- Apprenticeship programs
- Student loan repayment (up to $10,000 lifetime)
- Vocational training
- Test fees and tutoring
Gift Tax Considerations
Annual Gift Tax Exclusion (2025)
- $19,000 per beneficiary per year (single)
- $38,000 per beneficiary per year (married couple)
Superfunding (5-Year Gift Tax Averaging)
Make 5 years of contributions at once without gift tax:
| Contributor | 2025 Superfunding Maximum |
|---|---|
| Individual | $95,000 ($19,000 × 5) |
| Married Couple | $190,000 ($38,000 × 5) |
How it works: File IRS Form 709 to spread the gift over 5 years. No additional gifts to that beneficiary during the 5-year period, or they'll be subject to gift tax.
Estate Planning Benefits
Superfunding removes assets from your estate immediately while spreading gift tax consequences over 5 years. If you die during the 5-year period, a prorated portion returns to your estate.
Non-Qualified Withdrawals
If funds are used for non-qualified expenses:
| Consequence | Description |
|---|---|
| Income Tax | Earnings portion taxed as ordinary income |
| Penalty | 10% penalty on earnings portion |
| Principal | Returns tax-free (already taxed) |
Exceptions to 10% Penalty
- Beneficiary receives scholarship (can withdraw up to scholarship amount)
- Beneficiary attends military academy
- Beneficiary dies or becomes disabled
- Rolled over to Roth IRA (see below)
529-to-Roth IRA Rollover (SECURE 2.0)
Starting in 2024, unused 529 funds can be rolled to a Roth IRA:
Requirements
| Requirement | Description |
|---|---|
| Account Age | 529 must be open at least 15 years |
| Lifetime Limit | $35,000 per beneficiary |
| Annual Limit | Subject to Roth IRA contribution limits ($7,000 in 2025) |
| 5-Year Rule | Cannot roll contributions made in last 5 years |
| Earned Income | Beneficiary must have earned income ≥ rollover amount |
| Income Limits | Does NOT apply (unlike regular Roth contributions) |
Example: To roll the full $35,000 at $7,000/year would take at least 5 years.
Key Benefit
This provision allows families to overfund 529s without worrying about penalties - excess funds can eventually go to the beneficiary's retirement.
Changing Beneficiaries
529 beneficiaries can be changed to qualified family members:
- Siblings, parents, children
- First cousins, aunts, uncles
- Spouse of any of the above
Key Point: Beneficiary changes within the family are NOT taxable events.
Account Control
| Feature | Description |
|---|---|
| Account Owner | Controls the account (typically parent/grandparent) |
| Beneficiary | Receives the educational benefit |
| No Age Limit | Beneficiary can be any age |
| Owner Can Change | Owner can change beneficiary at any time |
529 vs. Other Education Savings
| Feature | 529 Plan | Coverdell ESA | UGMA/UTMA |
|---|---|---|---|
| Annual Limit | None (gift tax applies) | $2,000 | None (gift tax) |
| Income Limit | None | Yes ($110K/$220K) | None |
| Age Limit to Use | None | 30 | None (but transfers at majority) |
| Investment Options | Limited by plan | Self-directed | Broad |
| Control | Owner keeps control | Custodian | Minor at majority |
Key Exam Points
- Municipal fund security - Requires Series 6 to sell
- No income limits - Anyone can contribute regardless of income
- Superfunding - $95,000 individual / $190,000 couple (2025)
- Qualified K-12 - Up to $10,000/year for tuition
- 529-to-Roth - 15-year account age, $35,000 lifetime limit
- Non-qualified penalty - 10% on earnings + ordinary income tax
- Beneficiary changes - Family members, tax-free
- Owner control - Account owner retains control (unlike UTMA)
What is the maximum amount a married couple can contribute to a 529 plan using superfunding (5-year gift tax averaging) in 2025?
Under SECURE 2.0, what is a key requirement to roll 529 funds into a Roth IRA?
A client withdraws $20,000 from a 529 plan to pay for a non-qualified expense. The withdrawal includes $15,000 of contributions and $5,000 of earnings. What are the tax consequences?
4.4 Customer Identification Program (CIP)
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