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% 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.

Massachusetts offers a state tax deduction for contributions made to its U.Fund 529 plan or its U.Plan prepaid tuition plan. Residents can deduct up to $1,000 per year if filing as a single taxpayer or up to $2,000 if married filing jointly. Importantly, this deduction is per tax filer, not per beneficiary.

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% 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% 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 paying gift taxes on 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 can count the excess amounts toward the lifetime estate and gift tax exemptions amount, currently set at $13.61 per person, and will need to file IRS Form 709 in each of the five years to show that the amount is being spread over time.

Assistance with 529 Plan Changes

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. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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