The 529 plan is one of the most popular ways for families to save for college, as it offers strong tax advantages and means to grow money over time to cover educational expenses. Initially, 529 plans were relatively limited in scope. They focused on tax-deferred growth and withdrawals free from federal taxes, so long as their funds were used for “qualified higher education expenses,” such as tuition, room and board, required fees and supplies.

However, recent updates have made these plans even more flexible, providing new options for both beneficiaries and account holders. If you are a parent or grandparent looking to optimize your education savings for younger generations, here’s what you need to know: newer provisions for 529 plans, their expanded flexibility and a key financial aid loophole particularly useful for grandparents.

1. Rollover to Roth IRAs: One of the most significant changes to 529 plans comes from SECURE Act 2.0, which was signed into law in late 2022. As of the beginning of 2024, unused funds in a 529 plan can be rolled over into a Roth IRA for the beneficiary, under certain conditions. This is huge for those worrying about overfunding a 529 plan or whose children decide not to attend college. The provision sounds simple, but some key qualifications and limits need to be considered.

First, there is a lifetime rollover cap of $35,000, and this amount can only be rolled into an IRA account for the 529 beneficiary. In addition, this contribution amount is still subject to the annual IRA contribution limit ($7,000 currently), so it will take several years to convert funds from a 529 to a Roth. To prevent abuse of the rule, the account must also be 15 years old when the move from 529 to Roth occurs and the money rolled over must have been in the 529 account for five years. If you can meet these stipulations, this provision is a great strategy to make use of money in these accounts for the future of their beneficiaries.

2. Expanded flexibility: While 529 plans were initially designed strictly for college tuition and similar educational expenses, their utility has expanded. Besides K-12 private education expenses (up to $10,000 annually), apprenticeships and student loan repayments also have been included.

If a student chooses an apprenticeship program registered with the U.S. Department of Labor, 529 plan funds can cover fees, books, supplies and equipment required for the apprenticeship. Up to $10,000 from a 529 plan can repay the beneficiary’s student loans, and an additional $10,000 can pay for each of the beneficiary’s siblings. This makes 529 plans even more flexible if college expenses have been covered by loans.

3. The grandparent loophole: One advantageous strategy for families seeking financial aid involves the “grandparent loophole” in relation to FAFSA. Before 2024, distributions from grandparent-owned 529 plans were treated as untaxed income for the student. This income counted against the student, potentially reducing financial aid eligibility by as much as 50% of the distribution amount.

However, the newest FAFSA rules remove reporting requirements for cash support or distributions from grandparent-owned 529 plans. This is a game-changer, particularly for families seeking need-based financial aid. Distributions from grandparent-owned 529 plans no longer count as student income on the FAFSA. The previous rules encouraged families to delay distributions until the student’s final year of college to avoid hurting financial aid in earlier years. But now there’s no need to delay; grandparents can use these funds earlier without consequence. This closes the historical gap between parent-owned and grandparent-owned 529 plans, making it easier for grandparents to contribute to students’ education without inadvertently reducing the financial aid package.

This evolution of 529 plans shows a recognition of the diversity in modern educational paths. Whether by rolling over excess funds, funding apprenticeships or protecting financial aid via the grandparent loophole, 529 plans offer more opportunities to families than ever before. If you haven’t reviewed your education savings plan in a while, now is a great time to do so. Families concerned about the rising costs and complexity of education will want to consult a financial advisor. They can help you explore how these recent updates to 529 plans enhance your overall strategy. With these new provisions, 529 plans can play an even bigger role in securing a financially sound future for the next generation.

Zach Harney is a wealth advisor at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to Zach Harney, 2340 Garden Road Suite 202, Monterey, CA 93940 or email zach@montereypw.com.