One of the primary concerns for most, after saving for retirement, is education planning. Well, great news! The recently passed Secure Act 2.0 gives savers greater flexibility regarding how they allocate funds accumulated in 529 plans. We’ll review updates to Alabama’s CollegeCounts 529 Fund this week and follow up next week on increased options related to unused 529 Plan funds. Let’s start with understanding what the 529 Fund is and how it works.
What is Alabama’s CollegCounts 529 Fund?
The CollegeCounts 529 Fund is a qualified tuition program offered by the State of Alabama that makes it easy for parents, relatives, and family friends to invest in the next generation. The program has some great benefits, including its simplicity, significant tax advantages, no minimum contribution requirements, and ease of setting up automatic contributions.
Advantages of using the CollegeCounts 529 Fund include:
- Invested contributions that grow and can be withdrawn Tax-Free if funds are used for “Qualified Education Expenses.” Examples of this include:
- College tuition, room & board, books, computers & equipment
- K-12 tuition expense ($10,000 max per year)
- *NEW*: Student loans ($10,000 lifetime max)
- State of Alabama income tax deduction: $5,000 of contributions for Single filers ($10,000 MFJ)
- Contribution Limit: No additional contributions can be made after the account balance exceeds $475,000 for a beneficiary. NOTE: This maximum can vary by state, and the account may grow beyond $475,000.
What Are My Options for Unused 529 Plan Funds?
Before the passing of the Secure Act 2.0 in late 2022, those with unused funds in 529 plans were limited to the following options:
- Change the 529 Plan beneficiary to benefit another family member near term (Think other children here).
- Leave funds in the 529 account in case another family member has qualified educational expenses longer term (Think grandchildren here).
- Execute a Non-qualified distribution in which the earnings (*NOT contributed funds*) are subject to federal and state tax, plus a 10% federal tax penalty.
- NOTE: For Alabama state tax purposes, the taxable amount is equal to the amount of earnings withdrawn plus an additional ten (10%) of the amount withdrawn.
Be sure to check out Part 2 for NEW OPTIONS for Unused 529 Plan Funds: 529 Plan to Roth IRA Transfers.
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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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