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Advisors can help clients and their families plan for the rising costs of tuition and other educational expenses by knowing the benefits of 529 plans — and staying up-to-date on evolving rules around these investment vehicles.
529 plans, tax-advantaged savings accounts for education expenses, can be a great tool for parents planning for their children’s education and associated costs, but many Americans are not aware of these plans or how they can be used, research finds.
In fact, half of Americans (50%), aren’t aware of what 529 plans are, while less than a quarter have one of these investment accounts, a 2024 survey by Edward Jones found.
“Thanks to tax law changes over the past seven years, 529 plans are more useful and applicable than ever, and can often be used tax-free and penalty-free for secondary schools, technology purchases to further education and much more,” Andy Esser, an Edward Jones Financial Advisor, said in a statement for the survey.
In addition to up-front tuition costs, 529 plans can be used to cover the costs of vocational and trade schools; room and board; and — more recently — the repayment of student loans. Also, under the Secure 2.0 Act signed into law in 2022, unused 529 funds can be rolled over to a Roth IRA with some caveats, the survey said, noting that the majority of Americans were not aware of these uses.
Edward Jones’ survey, which was conducted in April 2024, polled a national sample of more than 2,000 adults.
Key Changes to 529 Plan Rules
Aaron Clarke, a wealth advisor at Gainesville, Virginia-based Heritage Financial, highlighted how the Secure Act 2.0 changed certain 529 plan provisions, and why it’s crucial for advisors to understand these updates.
“If people weren’t paying attention to that, it covers what you do when that student is out of school and there is still a balance in their 529 account,” Clarke said, noting that a 529 plan needs to have been open for at least 15 years prior to transferring the assets to a Roth IRA.
“And you can’t transfer any new money (added to the 529 account) in the last five years,” Clarke said of Roth IRA transfers. Rollovers are also capped at Roth IRA annual contribution limits, he said.
This caveat is why Clarke notes that “over contributing to a 529 plan is not the best” strategy.
“I’ve heard other advisors say, we fund it, and it’s not that big of a deal, because if not all that money gets used up, we can convert it to a Roth IRA,” Clarke said. “There’s some tricky stuff going on here (with the rules). I’m assuming they are going to rewrite some of the Secure Act 2.0 at some point.”
In recent years, “broad interpretations of the rule have been incorrect,” as it applies to 529 plans, Clarke added.
Other recent changes to 529 plans went into effect in 2019, allowing the beneficiary of a 529 savings account to use the funds to pay for up to $10,000 in student loans.
Clarke notes that the $10,000 is a “lifetime cap per individual” who is the beneficiary of a 529 account. “If I have three 529 plans with $10,000 in them each, I’m still limited to using $10,000 towards student loans for one individual or beneficiary,” he explained.
529 plans can also be a great training tool for college-aged students in particular, helping them to learn financial responsibility, Clarke said.
“A lot of my clients don’t want to just pay for college outright (for their kids),” he said.
“With one client, we save to the 529 plan, and the plan is as soon as their kid graduates, they will take out just around $10,000 and put that towards their student loan,” Clarke said, noting that they can use the savings account to help pay off student loans.
“It helps them to develop good financial planning habits, so they are not overspending in school,” Clarke said.
Danielle Walker is a freelance journalist with 15 years of business reporting experience. She previously worked at Business Insider and Pensions & Investments, among other business publications. Her work has been published in the Financial Times, Barron’s and Chief Investment Officer. Danielle is currently based in Norfolk, Virginia.
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The views presented here do not necessarily represent those of Advisor Perspectives.
