529 plans are the gold standard of college savings plans. Among their many benefits — a list that continues to grow with recent legislative changes — 529 plans can be helpful for families with long-term financial goals like retirement and estate planning. In this article, we examine how 529 plans can be used beyond college savings.
Retirement planning: The New Roth IRA provision
With the passage of SECURE 2.0, 529 account owners can now roll over a portion of funds into a Roth IRA. This change is a fantastic way for parents and grandparents to ensure that unused 529 funds continue to help their beneficiary into the future.
There are some rules and restrictions to keep in mind:
- How much you can roll over is restricted to the annual Roth IRA contributions limits.
- The lifetime rollover amount is capped at $35,000 per beneficiary.
- The 529 plan must have been in the beneficiary’s name for at least 15 years.
- Any 529 contributions eligible for a rollover must have been invested for a minimum of five years.
Keep reading: Added Flexibility: 529 to Roth IRA Rollovers
Estate planning: Reducing Estate Tax Liability
It’s no secret that 529 plans can also help in estate planning. But before we answer the ‘how,’ let’s define a few key terms.
First is federal estate tax, which is imposed on the transfer of property after someone dies and comes out of the estate. The gross estate could include cash, real estate, trusts and annuities.
There’s also state estate tax, which also applies to the transfer of property and levied by 12 states and the District of Columbia. The tax rate varies between each state.
Finally, there’s a state inheritance tax, which is the responsibility of the person receiving property from an estate. Only a handful of states impose an inheritance tax, and the tax rate varies depending on the inheritor’s relationship to the estate holder.
As of 2024, the federal estate tax applies to all estates worth over $13.61M (or $27.22M for married couples filing jointly). While this number may not apply to you or anyone you know, it is set to drop to the $6M range in 2025 and can fluctuate at any point moving forward.
Unlike bank accounts and personal investments, which count toward the gross estate, funds held in a 529 plan are excluded from the estate, even though the estate owner is the account owner of the 529 plan.
Thus, the estate owner retains all control of the 529 account, like asset allocation and designating a beneficiary. By placing funds in one or multiple 529 plans, someone could reduce the value of their estate to help avoid estate tax.
And remember those 13 states that levy an estate tax? The exemption amount is much lower compared to federal estate tax – as low as $1M in some states. But the good news is that most states follow exemptions imposed under federal estate tax law, like excluding 529 contributions from the gross estate. Still, it’s a good idea to check your own state’s guidelines.
Finally, a handful of states (currently six) impose an added inheritance tax, which could mean an additional tax at the state level for estates valued over a certain amount. Again, you will want to check your state’s guidelines to see if they impose an inheritance tax and if 529 contributions (in which you are the owner) are excluded.
The importance of annual contributions
According to attorney Jennie Lin in her article 529 Plans for Estate Planning and Retirement, “The federal estate tax is technically an estate-tax-and-gift-tax, meaning that both your property at death and the gifts you made over your lifetime count toward the exemption amount.”
As of 2024, the annual gift tax exemption is $18,000 (or $36,000 for married couples filing jointly) per recipient. Anything gifted over that amount in a tax year is added to your taxable estate and would be included along with any other assets in your taxable estate. Again, 529 plans are essential here.
Annual contributions to 529 plans qualify for the annual gift tax exemption. If someone wants to reduce their taxable estate, they can gift up to $18,000 per year per beneficiary to a 529 plan, reducing their taxable estate by that total amount while retaining control of the funds.
In addition to these annual contribution exemptions, 529 plans are also eligible for a super funding provision, which allows an account owner to front-load five years’ worth of contributions (currently $90,000, or $180,000 for married couples) in one year. This super funding applies to each beneficiary. For someone who is looking to significantly reduce their taxable estate, it’s a smart strategy.
Sources:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
https://www.nolo.com/legal-encyclopedia/529-plans-for-estate-planning.html
https://investor.vcm.com/insights/investor-learning/how-to-use-a-529-plan-as-an-estate-planning-tool
