If you’ve got grandkids or might have some soon, you should know about the recent updates to education investment plans called 529s. They’re one of the best ways grandparents can help their grandkids go to college while saving on their own taxes along the way.

Not surprisingly, as the cost of education keeps rising, these plans have become very popular. The Educational Data Initiative says there are over 16 million 529 accounts in the United States, with almost $500 billion saved in them.

And recent changes make 529s an even smarter investment for grandparents. Read on to learn the basics about 529 plans and what’s new this year.

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Understanding the basics

Like retirement 401K or IRA savings plans, all 529 plans offer tax advantages. The money your investment earns while it’s in a 529 account isn’t taxed by the IRS. And the money taken out of the account to pay for “qualified” education expenses isn’t taxed, either.

There are two types of 529 plans: prepaid plans and savings plans. Here’s how Ashley Weeks, a wealth strategist at TD Bank in Greenville, South Carolina, explained it in U.S. News & World Report: "Funds in both 529 account types grow tax-free, and future distributions are tax-free if used for qualified education expenses.” After that, there’s a big difference. As Weeks goes on to explain: “Prepaid tuition plans lock in future tuition at current rates through the purchase of tuition credits. These plans only pay for tuition and fees at certain covered colleges and often have state residency requirements."  Because 529 savings plans are available almost everywhere to everyone and have a broader list of qualified uses, they are far more common.

Picking a state

With a 529 savings plan, you don’t have to choose a plan offered by your own state. That’s especially good news if you live in Wyoming, which is the only state that doesn’t offer a 529 plan. In fact, you can compare plans to see which are performing best – earning the most money with the lowest fees.

That said, there’s often an incentive or two to lean toward your own state’s plan. Many states offer a tax deduction on your state income tax for the money you invest in their 529 plan – often with high limits for big tax and investment benefits. Some states offer matching contributions. And a few states are even enrolling newborns or young children in their plans automatically, encouraging families to start saving for education early.

When picking a state, check the rules to learn which expenses are included. Is it just tuition, or also room and board, textbooks, school supplies, and student loan payments? In most plans, you can also use the money for private school expenses for kindergarten through high school, apprenticeship and vocational programs, and even some homeschooling expenses. But there might be taxes or penalties for these options. Be sure you know the rules for the plan you pick.

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A new option for unused funds

Of course, sometimes, situations change. Your grandchild might launch a killer startup instead of going to college, pick a program that doesn’t qualify for using 529 funds, get a full scholarship, or follow another path. If you simply take out the money for a “non-qualified” use, you’ll pay taxes and a 10% penalty – and that adds up.

If you find yourself with unused funds, the first step is to check your state’s rules. You may be able to transfer the funds to another relative or even use it to go back to school yourself.

This year, there’s another good option. Take the money you were saving for your grandchild’s education and move it into a Roth IRA retirement account for them instead. (Yes, it has to be for the same beneficiary.) This step won’t trigger any income taxes or penalties as long as you’ve had the 529 account open for at least 15 years.

Check all the rules for the new Roth IRA option before you start moving money around. For instance, you can’t transfer money you added during the last five years. Also, Roth IRA guidelines dictate exactly how much money you can move each year.

The key is to get solid financial advice before moving any funds so you avoid taxes and penalties. But overall, the new Roth IRA option provides much more peace of mind about making 529 contributions now, even though you can’t completely predict each grandchild’s future.

Making smart choices

It might cross your mind to skip saving for your grandkid’s college so they might get a bigger financial aid package from their future school. It’s true that when parents have funds in a student’s 529, most colleges take that money into account and might award less financial aid. Some schools don’t look at 529 funds at all, but most do.

But thanks to another recent change, that’s no longer a concern for grandparents. The money you invest in a 529 won’t impact your grandkids’ financial aid awards. Just be sure you set up the fund yourself instead of donating to a plan set up by the child’s parents.

That’s one of the many smart steps to learn about when you’re wondering if opening a 529 plan makes sense for your family. Given how much plans vary, it’s important to learn all the rules for your 529 before you invest. Seek advice from your banker, your investment advisor, or the manager of your 529 program. They’ll help you figure out the details that work best for you.

Medicare and maximizing your money

It’s a smart move to get expert advice on all your money decisions. Making well-informed financial choices on everything from healthcare to household bills can leave you more money to use on your priorities, like contributing to 529 savings plans for your grandkids.

When it comes to Medicare, it can be confusing to figure out the right coverage for you at the right price. We’re here to help. Give us a call to discuss plans available in your area, or check out our easy-to-use Find a Plan tool.

Additional resources

• ClearMatch Medicare: Find a Medicare Plan
• U.S. News & World Report: The Ultimate Guide to Understanding 529 College Savings Plans
• Forbes: What is the New 529 Rule in 2024?
• CNN: 529 Rollover to a Roth IRA
• CNBC: How 529 Plans are Now More Valuable
• Bankrate.com: How to Roll Over a 529 Plan to a Roth IRA