Got RMDs? Consider using them to fund a 529 college savings plan

Got RMDs? Consider using them to fund a 529 college savings plan
Key takeaways
You may not need the RMDs

Consider contributing RMDs to a 529 plan for a child if you don’t need them for regular expenses.

Get tax benefits

Contributions may be tax deductible and all earnings grow tax-free. Withdrawals aren’t taxed either if used for qualified education expenses.²

You still own the money

You decide how it’s invested, can change the beneficiary, and may be able to use it in an emergency if necessary.

You saved diligently for retirement, taking advantage of a tax-deferred traditional IRA and 401(k). You’ve reached age 72 and are required to start taking withdrawals from these tax-deferred retirement accounts. But you don’t need these required minimum distributions (RMDs) for regular expenses. Consider using them to help educate your grandchildren or another favorite child. With the costs of attending college steadily on the rise, anything can help.

Here are three reasons to use RMDs to fund a 529 college saving plan.

1. Help minimize taxes

RMDs are considered taxable income so you pay taxes on that money when it’s withdrawn. If you don’t need it for any expenses, you’ll likely invest it. That means any earnings on it will be taxed. By putting that money in a 529 plan, it won’t be taxed again. Your money can once again take advantage of tax-free growth. Earnings in 529 plans and distributions for qualified expenses are federally tax-free. You can get a state tax deduction for 529 contributions. Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit. (Contributions to 529 plans are not federally tax deductible.)

2. The money is still yours

The money in a 529 plan you own is technically yours, you name a child as a beneficiary. You can change the beneficiary if the child decides not to go to college. You choose the plan and the investments and manage withdrawals. You can access it in an emergency although you’ll need to pay income taxes and a 10% penalty on any earnings. Contributions aren’t taxed.

3. It can be used for more than college tuition

In addition to tuition, funds from 529 plans can be used for qualified educational expenses such as textbooks or laptops, junior college, room and board, study abroad programs, and tuition for vocational schools, technical colleges, and qualifying trade schools. In some states, up to $10,000 per year can be used for K-12 tuition expenses

Some considerations

You can contribute to an existing 529 plan, for instance, if the child’s parents have one. But you don’t get the state income tax deduction or have any control over the account if it’s not in your name.

The impact on financial aid varies depending on who owns the 529 plan (the beneficiary, the parents, or anyone else). The assets in a 529 plan owned by anyone other than the parent or student aren’t counted for financial aid purposes. Withdrawals from 529 plans, however, must be reported in the student’s FAFSA application as student income, which can reduce financial aid eligibility by 50%. Starting with the 2024-2025 award year, however, students will not need to report any financial contributions they receive, including funds from non-parent owned 529 accounts. Work with your financial professional to see what makes sense for your situation.1

All contributions help

With the tax-free growth potential, even small amounts can add up in a 529 plan. If you’re able to open one when the child is still young, that’s even better. It gives the money a long time to grow. Plus, it can reduce the need for parent and student loans.

Learn more about a 529 plan and visit our ABCs of education page to view the guide that can help you get started. 


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