Americans Are Missing Out On 529 Plan Benefits: Here's How They Can Be Used For More Than College Savings

As the cost of higher education soars, 529 plans are widely recognized as an effective hedge against escalating college costs. Yet many Americans are unaware of their full potential.

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A new study finds that while these tax-advantaged savings plans are commonly associated with funding college tuition, many 529 savers may not realize the full range of expenses covered by these plans.

Named after Section 529 of the Internal Revenue Code, 529 plans are government-sponsored, tax-advantaged savings plans for future college tuition costs. They come in two main types: prepaid tuition plans and college savings plans.

Prepaid tuition plans allow contributors to pay for future tuition and mandatory fees at current prices. However, they are typically limited to in-state public colleges and universities and have residency requirements.

College savings plans are investment accounts that offer more flexibility, allowing you to use your funds at any eligible institution, including private and out-of-state colleges, as well as vocational and trade schools. As with all investments, you can lose money in a college savings plan.

Contributions to a 529 plan are tax-free, and withdrawals are also tax-free when used for qualified education expenses. People use these funds for tuition, fees, and required textbooks, but the scope of qualified expenses is much broader than many of us realize.

Lesser-Known Uses of 529 Plans

Although it's an essential tool for saving for college, an Edward Jones survey found that half of American adults (50%) are unaware of 529 plans and less than a quarter have opened one.

Additionally, only 25% of respondents are aware that 529 plans can be used for expenses other than higher education. The survey found that a significant barrier to adoption of these plans is the misconception that substantial savings or income are required to open a 529 account.

If you thought 529 plans were limited to traditional tuition savings, it might be time to explore the following 529 plan options:

Vocational and business schools

Vocational and trade schools provide valuable training and education in a variety of technical and professional fields and can lead to high-paying and sought-after careers. Families looking to fund their children's or their own vocational education can benefit greatly from using 529 plans.

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Room and board

Room and board expenses are eligible expenses under Section 529 for students enrolled at least half-time. This can help ease the cost of attending college, as room and board expenses often compete with tuition.

Repaying Student Loans

The SECURE Act, passed in December 2019, allows up to $10,000 from a 529 plan to be used to repay student loans.

Transfer to a Roth IRA

One of the lesser-known benefits of 529 plans may be one of the most powerful. Starting in 2024, beneficiaries of 529 plans will be able to roll over up to $35,000 into a Roth IRA over their lifetime, as long as the 529 account has been open for at least 15 years. This allows unused college savings to be rolled over into retirement, strengthening a person’s long-term financial security.

Learn more: “It’s Not Taxed at All”: Warren Buffett Shares the “Best Investment” You Can Make When Battling Rising Costs — Take Advantage Today

Maximizing 529 Plan Benefits

To get the most out of your 529 plan, it helps to understand the different eligible expenses and plan strategically. Here are some tips:

• Stay informed about eligible expenses:Review the list of eligible expenses on the IRS website regularly or consult a financial advisor to make sure you know how to use your 529 funds.

• Multiple beneficiary plan:If one child doesn't use all the funds in their 529 plan, the remaining balance can be transferred to their sibling, tax-free and penalty-free. This flexibility can help you maximize the money you've saved.

• Consider long-term planning:Given the new Roth IRA rollover provisions, families can now consider using 529 plans as a dual-purpose savings vehicle for education and retirement. This long-term strategy can provide significant tax benefits and financial security.

• Find a trusted supplier:Choosing the right 529 plan provider is important. Look for transparency in fund fees and performance, responsive customer service, and flexible investment options that match your risk tolerance and goals. Also consider age-based portfolios, which automatically adjust as the beneficiary approaches college age.

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This article is provided for informational purposes only and should not be construed as advice. It is provided without warranty of any kind.