5 Overlooked Tax Benefits of 529 Plans, #227
In this episode, we’re diving into the often-overlooked tax benefits of 529 plans. Most people know that 529 plans can help cover college expenses, but there are other valuable perks beyond just tuition savings.
From paying down student loans to making the most of tax deferral advantages, this episode breaks down five key tax benefits you may not be aware of. Let me help you maximize the potential of your 529 plan.
You will want to hear this episode if you are interested in...
[1:39] What are 529 plans?
[3:04] Repaying student loans
[4:14] Covering K-12 expenses
[5:20] Tax deferral
[8:10] Roth conversion
[12:40] Potential state tax deductions
The Basics of a 529 Plan
A 529 plan allows you to invest money specifically for education expenses. The funds can be withdrawn to cover college costs such as tuition, fees, books, supplies, computers, special needs equipment, and apprenticeship programs. However, some expenses—like transportation, health insurance through the school, and exam fees—are not covered.
5 Tax Benefits of 529 Plans
What are the top five tax benefits?
Repaying Student Loans: You can use up to $10,000 per year, per beneficiary (or their siblings), from a 529 plan to pay down student loan interest and principal. Keep in mind, that if your child has multiple 529 plans, they’re limited to a $10,000 lifetime maximum for loan repayment.
Covering K-12 Education Expenses: You can use up to $10,000 per year from a 529 plan to pay for private K-12 school tuition. Funds in a 529 plan can be contributed solely for this purpose, though they don’t cover books, room and board, and some schools may not qualify.
Tax Deferral: Money in a 529 plan can be invested in options like money markets, bonds, or stock funds, allowing it to grow over time. One major advantage is that dividends, interest, and capital gains are tax-deferred. When withdrawn for qualified expenses, these earnings remain tax-free.
Roth Conversion Opportunity: Thanks to the SECURE Act 2.0, you can transfer up to $35,000 per beneficiary from a 529 plan to a Roth IRA if the 529 plan has been open for at least 15 years. If your child no longer needs the funds, you can even make yourself the beneficiary and transfer the money to your own Roth IRA (subject to additional requirements—listen for more details).
Potential State Tax Deduction: Many states with income taxes offer a deduction for contributing to a 529 plan. In Connecticut, for example, individuals can save up to $300 per year on state income tax (assuming a 6% tax bracket). Listen to the episode to learn about your state’s rules.
Want to get the full details? Tune in to this episode of Retire with Ryan to understand how to make the most of these often-overlooked tax benefits of a 529 plan!
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