Up until now, 529 savings plans were widely considered the best way to save for college. But there was always a major sticking point, according to financial experts and plan investors.
The funds had to be used for qualified education expenses such as tuition, fees, books and room and board. Even though the restrictions had loosened in recent years to include continuing education classes, apprenticeship programs and even student loan payments, any limitations on this future savings created “a mental barrier,” said College Savings Foundation Chair Vivian Tsai.
Starting in 2024 — thanks to “Secure 2.0,” a slew of measures affecting retirement savers — families can roll unused money from 529 plans over to Roth individual retirement accounts free of income tax or tax penalties.
“Most people’s objections are ‘what if I don’t use this money for education.’ Now you can use it for retirement,” Tsai said. “It removes a significant objection.”
“This is a big deal,” she added.
The benefits of a 529 college savings plan
These plans have been steadily gaining steam for several reasons.
In some states, you can get a tax deduction or credit for contributions. A few states also offer additional benefits, such as scholarships or matching grants, to their residents if they invest in their home state’s 529 plan.
Yet, total investments in 529 plans fell to $411 billion in 2022, down nearly 15% from $480 billion the year before, according to data from College Savings Plans Network, a network of state-administered college savings programs.
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“Last year, we saw a pretty noticeable reduction in contribution behavior,” said Chris Lynch, president of tuition financing at TIAA. Regular contributions to a 529 college savings plan took a back seat to paying more pressing bills or daily expenses, he…
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