529 plans can benefit adults in numerous ways besides being a savings vehicle for a child's education. It offers a straightforward way for adults to finance their education, take non-qualified distributions, fund a Roth IRA, and, under certain restrictions, make payments towards outstanding student loans. The flexibility of a 529 plan provides adults with options for using the monies saved in this unique savings strategy.
Financing an adult's education
Using a 529 plan for adults returning to school is remarkably straightforward. Contributions to a 529 plan grow free from federal and, in most cases, state taxes. These distributions are tax-free when withdrawn and used to pay for qualified higher education expenses such as tuition, fees, books, and room and board for beneficiaries enrolled at least half-time. Adults can even set up a 529 plan on their behalf, making themselves both the account owner and the beneficiary.
Other uses for a 529 plan
Non-qualified distributions
A 529 plan allows non-qualified distributions for purposes other than educational expenses. However, it's essential to know that withdrawing money for non-educational expenses may result in income tax on any earnings portion of the distribution and a 10% penalty. The penalty can be waived in specific circumstances, for example, if the beneficiary receives a scholarship or attends a U.S. military academy. To understand how non-qualified distributions work and if a non-qualified waiver would apply, consult a financial professional.
Roth IRA transfers
Another feature of a 529 plan is its flexibility in transferring funds to a Roth IRA without income tax implications. To do this, one must transfer funds from your 529 plan to a Roth IRA, but only after money is left over in the 529 plan from previous eligible higher education expenses.
- There is a lifetime limit of $35,000
- The transfer period is over five years
- The transfer can't exceed the total higher education expenses
- Transfers must be under the IRS allowable yearly contribution limit into a Roth IRA.
Student loan payments
With changes in federal law brought about by Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, a 529 plan can now also be used to repay principal and interest on qualified education loans. Certain conditions apply, such as:
- Up to a lifetime limit of $10,000
- The limit applies per individual
- A sibling can repay a student loan up to $10,000 from the same 529 plan.
However, using a 529 plan to pay student loan debt has limitations. For instance, you cannot double-dip on federal education benefits. If you paid student loan interest with tax-free 529 plan earnings, you cannot claim the student loan interest deduction.
In conclusion, a 529 plan presents an attractive option for adults desiring to further their educational pursuits, make non-qualified distributions, transfer to a Roth IRA, or pay toward student loans. Work with a financial professional to analyze your circumstances and understand the nuances of 529 plans so you can make an informed decision.
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Important Disclosures:
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Please consult with your tax advisor before investing.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
LPL Tracking #693109
Sources:
https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira
https://www.savingforcollege.com/article/strategies-for-using-a-529-plan-to-repay-student-loans
