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Giving your grandchild a head start on their education is a meaningful gift. And a 529 plan is one of the most effective, tax-advantaged ways to do it. But before you decide how to save for a loved one’s education, it’s important to understand the impact beyond just college tuition.

In this episode of Money Wisdom, Nicholas J. Colantuono, CFP® and Eric Hogarth, CFP® break down how 529 plans work and what to consider before opening one.

How a 529 Plan Works

When saving for a child’s or grandchild’s education, many people consider a 529 plan. These tax-advantaged accounts provide tax-deferred growth and tax-free withdrawals for qualified educational expenses. They also allow you to retain control of the funds if the beneficiary doesn’t use them.

Tax Advantages

Your 529 plan contributions may also qualify for state tax deductions, depending on where you live. In Connecticut, contributions to the Connecticut Higher Education Trust (CHET) can provide a tax deduction of up to $10,000 for a joint return. In Massachusetts, the U.FUND College Investing Plan offers a bit of a lower deduction of up to $2,000.

Contribution Rules

The federal annual gift tax limit sets how much you can give tax-free to each beneficiary per year. Those limits are currently $19,000 per year per individual or $38,000 for a married couple. You also have the option of “super funding,” which allows you to contribute five years’ worth of gifts in one year, up to $95,000.

From an estate planning perspective, super funding can be impactful. The money can grow tax-deferred for a longer period, maximizing its potential. You can also use required minimum distributions (RMDs) that you don’t need to fund the account.

New Flexibility

Under the SECURE 2.0 Act, you can roll over up to $35,000 of unused 529 funds into a Roth IRA for your grandchild. This provides additional tax-free growth and can even help them with their first home purchase. If you choose to withdraw any leftover funds not used for education, you’ll have to pay a penalty and taxes on the earnings.

The rules around 529 plans are constantly evolving, so it’s essential to stay informed and work with a financial planner. Whether you’re saving for your grandkid’s education or your own, 529s can be a powerful tool for building a brighter future.

Interested in building a simple, actionable plan for your retirement and investment success? Get your free Money Map book by texting “MAP” to 800-757-0436.