529 Assets Are Growing, But Education Still Needed

While tuition inflation is back to normal after a dip during the pandemic, 529 Savings Plans are becoming an even more popular way to save for education.

That growth, however, may be somewhat limited even as the vehicles have gained flexibility in their use, according to experts. Many employers and participants appear to lack education and awareness about how these accounts work and where the variety of ways the funds can be used, according to a survey conducted by Edward Jones.

To be sure, assets in 529s have been growing in recent years due to a mix of contributions and market gains. According to Paul Curley, director of 529 and ABLE Research at ISS Market Intelligence, which is the parent company of PLANSPONSOR, 529 assets grew 5.7% in the first quarter of 2024, and 15.6% over the past year.

Account balances also, on average, increased 1% during the first quarter of 2024, and 3.1% over the past year.

Trisha Good, executive director of the Ohio Tuition Trust Authority that runs the state’s 529 plan, CollegeAdvantage, said in a recent webinar hosted by ISS that increased attention has been paid to 529s since the SECURE 2.0 Act of 2022 passed, as 529 accountholders can now roll over funds from a 529 tax-free and penalty-free to a Roth IRA as long as they meet certain qualifications.

Good also explained that with Ohio’s 529 plan, funds can be used at any kind of school, in-state or out-of-state. This includes community colleges, traditional colleges and universities, undergraduate and graduate programs, technical or trade schools, certificate programs and apprenticeships.

In 2018, there was also an expansion of qualified expenses to include K-12 tuition and student loan repayments—a fact that many people still don’t know about today, according to Andy Esser, an Edward Jones financial adviser.

Despite the increased flexibility with 529s, Esser says education and awareness and education of the savings vehicle is still lacking among employers and participants. In a recent survey Edward Jones conducted with more than 2,000 adults, 50% said they don’t know what a 529 plan is and fewer than a quarter have a 529 plan. Meanwhile, only 25% know that 529 plans can be used to fund more than just higher education.

Esser finds that many people are concerned about being able to fund a 529 with other priorities, such as daily expenses and retirement savings.

“The biggest misconception is that people don’t make enough or have enough to save in a 529 plan,” Esser says. “What I try to tell people is that it’s all part of a balanced process …. we help them understand where their priorities are and how to create a holistic strategy.”

Adding ABLE

Meanwhile, ISS’s Curley said momentum is also building around ABLE accounts, which are tax-advantaged savings accounts for individuals with disabilities and their families. The Achieving a Better Life Experience Age Adjustment Act goes into effect in 2026, which increases the age threshold from 26 to 46, providing any individual whose disability onset began prior to turning 46 the opportunity to open an ABLE account.

Curley added that there are opportunities for 529 savings plans and ABLE accounts to grow even more, such as by allowing for automatic contributions and gifting functionalities from family members.

“Even saving 1% of your income or paycheck to that goal of saving for college over 18 years does add up to a material amount, and there’s a lot of opportunities nudge [contributions] up from 1% to 2% and etc.,” Curley said.

Employers, Esser notes, will vary on why they might offer and communicate to participants on using 529s.

“Philosophies are going to vary widely,” he says. “More small business owners end up being conscious and empathic to the needs of their employers … a lot are looking more broadly at health insurance benefits, childcare benefits, and 529s. The question is really what the employer is willing to step up to the plate to provide.”

IRA Potential

Connecting unused 529 savings to retirement savings may be one of the keys to making 529s more attractive. During the webinar, Good laid out the requirements people need to be aware of when thinking about how unused 529 funds might be rolled into a Roth IRA. They include:

• The Roth IRA beneficiary and the 529 beneficiary must be the same person;
• It needs to be a trustee-to-trustee direct transfer;
• The 529 account must have been opened for at least 15 years before rolling over to a Roth IRA;
• Yearly Roth IRA contribution limits apply;
• Funds need to be in a 529 account for at least 5 years before rolling over to a Roth IRA;
• The lifetime maximum is $35,000 to roll over from a 529 plan to a Roth IRA.

“Based on our research to date … parents [and] advisers really like the [Roth IRA rollover option] as a fallback feature,” Curley said. “Many think, ‘What if I save for college and my child does not go to college or ongoing education?’ … It’s nice to have that fallback feature, and with that, there’s a reduced level of concern and objections for parents and advisers to open up an account.”