Changes to 529 plans happen virtually every year. And every year (2021, 2022), the changes are usually more beneficial. These changes usually focus on helping students and their families ease the burden of paying for an ever-increasing college education.
Here are some of the changes on tap in 2023 for 529 savings accounts.
Federal Limit Increased
As is usual, Congress increased the gift tax maximum by $1,000 for 2023. Now parents can contribute up to $17,000 per year per person to a 529 plan in 2023 without incurring federal gift taxes, or $34,000 if the parents are married and filing jointly. It was set at $16,000/$32,000 in 2022.
Rollovers to IRAs Allowed
Hidden in the $1.7 trillion spending bill passed at the end of December 2022 was that Americans with unused funds in their 529 plans have a new option. Before the only option was to withdraw the unused funds at a penalty or roll them over to a new student (think niece, nephew, or grandchild).
However, Section 126 of the bill amends the IRS Code so that beneficiaries of 529 plans can roll over funds from their 529 accounts into Roth IRAs tax and penalty free, effective for distributions after December 31, 2023.
Grandparent Contributions Fixed
The government is working to streamline the Free Application for Federal Student Aid (FAFSA) application process, as part of a bill that was signed into law back in December 2021. The bill, effective for the 2023-2024 school year, will no longer count distributions from grandparent-owned 529 college savings plans as untaxed student income, and they will not have a detrimental impact on aid eligibility.