New Changes in 529 Plans Bring Greater Value for Families

Since their inception in 1996, 529 plans have long been regarded as a valuable college savings vehicle, helping families mitigate the burden of substantial educational expenses. As tuition rates continue to rise year over year, recent changes in the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act further enhance their appeal and bring greater flexibility for the 2024-2025 school year and beyond.

According to U.S. News & World Report, tuition and fees at private national universities have climbed 126 percent over the last 20 years, from $21,476 in 2005 to $48,591 in 2025. The ripple effect of rising tuition costs has led families to utilize 529 plans not only to assist with tuition and prevent future debt but also to benefit from tax-deferred growth and potential state-level tax breaks.

Arizona residents are eligible to deduct up to $4,000 per beneficiary for married tax filers and up to $2,000 per beneficiary for single filers, with no limit on the number of beneficiaries. In addition, Arizona’s tax parity status means that residents can take advantage of the tax deduction for both in-state and out-of-state 529 plans.

Despite their benefits, for years there’s been an undercurrent of concern regarding the limitations on how the funds could be used, namely solely for qualified education expenses. In the past, if a student received scholarships or chose a different path after high school, any earnings on non-qualified withdrawals would be subject to normal income tax plus a 10 percent penalty.

As of January, recent federal legislation has significantly expanded the ways 529 plan funds can be used. Here are the top three changes to keep in mind.

1. New Roth IRA Rollover Rules

Under the SECURE 2.0 Act, 529 plan account owners can make tax- and penalty-free rollovers of unused funds to individual Roth retirement accounts, provided that the following conditions are met, including:

• Beneficiaries can roll over up to a lifetime limit of $35,000 to their Roth IRA.
• The 529 account must have been open for more than 15 years.
• Funds cannot be rolled into a Roth IRA until five years after the funds were contributed or earned.
• Rollovers are subject to the IRS’s annual contribution limits. In 2024, the contribution limit for those under 50 is $7,000.

If the 529 plan exceeds the $35,000 lifetime rollover limit, there are several options to consider. The account owner can change the beneficiary at any time and continue using the funds for educational expenses, withdraw the excess amount and be subject to taxes and penalties, use the funds for private K-12 education or graduate school, or use up to $10,000 per lifetime to pay student loans for the beneficiary.

2. Nonparent-Owned 529 Plans Will Not Count as Income on FAFSA

Often referred to as the “grandparent loophole,” the second new change introduces an important benefit for nonparent-owned 529 plans. Starting with the 2024-2025 academic year, distributions from these plans will no longer impact a student's eligibility for financial aid.

Previously, withdrawals from nonparent-owned 529 plans were considered untaxed student income that had the potential to reduce aid by up to 50 percent of the distribution amount, negatively impacting need-based access to assistance.

Now, under current law the student’s total income will align with the FAFSA’s focus on federal income return information. Meaning, students can benefit from both family support and institutional aid without one impacting the other.

3. Increased Contribution Limits

When weighing how much to contribute to a 529 plan, families should consider the annual gift tax limits. In 2024, individuals can contribute up to $18,000 per beneficiary ($36,000 for married filing jointly) without filing a gift tax return. The limits for 2025 are expected to be $19,000 for individuals and $38,000 for joint filers.

For larger contributions, families can consider front loading five years of contributions all at once. “Superfunding” a 529 account provides the opportunity to avoid using any of the lifetime gift and estate exclusion, currently set at $13,620,000 per individual, for a large, one-time gift rather than spreading the contributions over a number of years. This means that individuals can give up to $90,000 per beneficiary in 2024 ($180,000 for married filing jointly) to superfund the account. The money in the account will grow tax deferred and will be eligible for additional contributions after five years.

Individuals superfunding an account or exceeding annual limits will need to file a gift tax return (IRS Form 709) but likely no tax will be due, since the lifetime exclusion is available. If the election is made to treat the superfunding contribution as if it was made ratably over a five-year period, then a gift tax return will not have to be filed for the next four years, unless other gifts that would require filing of a gift tax return are made.

Assistance with 529 Plan Changes

For any questions related to 529 plans, college savings strategies, or year-end contributions, please contact your R&A advisor to discuss the specifics of your situation.