10.4 Education Savings: 529 Plans & Coverdell
529 Plans and Coverdells provide tax-exempt growth for educational expenses. The 2024+ SECURE 2.0 rollover provision to Roth IRAs is a modern test topic.
Key FINRA Exam Takeaways
- 529 College Savings Plans: State-sponsored municipal fund securities, after-tax contributions, federal tax-free qualified education distributions.
- K-12 tuition: Up to $10,000 per year per student can be used for elementary/secondary tuition.
- SECURE 2.0 Rollover to Roth IRA: Up to $35,000 lifetime maximum from a 529 plan open for at least 15 years can be rolled over to the beneficiary's Roth IRA.
- Gift Tax Exclusion: 5-year gift tax front-loading (accelerated gifting up to 5 × annual gift exclusion limit) allowed.
- Coverdell Education Savings Account (ESA): Maximum $2,000 annual contribution per child, phased out at higher income levels, must be distributed by age 30.
529 Plan 5-Year Gift Tax Accelerated Election
A donor can contribute 5 years of annual gift exclusions in a single lump sum without incurring federal gift tax, provided no additional gifts are made to that beneficiary over the 5-year window.
SECURE 2.0 529-to-Roth Rollover Rules
Effective 2024, unused 529 funds can be rolled into the beneficiary's Roth IRA up to a lifetime cap of $35,000. Requirements: 529 plan must have been open for at least 15 years, and transferred funds must have been in the account for at least 5 years.
A grandmother wishes to contribute a substantial lump sum to her newborn grandson's 529 college savings plan without incurring federal gift taxes. How many years of annual gift exclusions can she front-load into the 529 plan in a single year?