This year, a significant alteration to 529 plans is prompting parents to save more for college.

• A new rule that enables funds from a 529 college savings plan to be transferred to a Roth individual retirement account is predicted by many experts to boost interest rates.
• A recent report indicates that 76% of parents are more likely to open a 529 account due to this benefit.
• Other data indicates that $100 million in assets from 15,000 529 plans were transferred to Roth IRA accounts.

This year, a big change happened to 529 college savings plans.

Starting in 2024, families can transfer unused 529 funds to the beneficiary's Roth IRA without incurring taxes or penalties, provided the 529 plan has been open for at least 15 years.

According to ISS Market Intelligence, $100 million in assets from 15,000 529 plans were transferred to Roth IRA accounts in the first half of 2024.

Few experts anticipated an immediate boost in interest in 529s due to the new benefit.

Some families pay $500,000 for Ivy League admissions consulting, while the sticker price at some colleges is now nearly $100,000 a year. The benefits of giving to a 529 college savings plan are worth considering.

Flexibility 'motivates' 529 funding

The flexibility of rolling over funds into a Roth IRA is significantly impacting savers, with 23% of parents citing it as a key factor in their decision to open a 529 plan, according to a recent report by Saving For College.

The report found that among the 12% of respondents who do not have a 529 plan, 76% say the benefit of making them more likely to open an account is a significant factor.

A survey of over 1,100 adults through Saving For College's site and newsletter found that 57% of families with an account are more likely to increase their 529 plan contributions due to the 529-to-Roth rollover benefit that took effect in January.

"Having some more flexibility can motivate clients to fund a 529," said David Nienaber, a financial planner and shareholder at Foster & Motley Wealth Management, which ranked No. 34 on the 2024 CNBC Financial Advisor 100 list.

529-to-Roth rollovers are 'icing on the cake'

In recent years, the restrictions on tax-advantaged 529 plan withdrawals have been loosened to include continuing education classes, apprenticeship programs, and student loan payments.

These 529-to-Roth rollovers provide greater flexibility, even for those who never attend college, according to Nienaber, who referred to it as "the icing on the cake."

Some experts argue that a point of resistance to 529s is that if a child doesn't need any of the savings for education, it may not be worth the effort and expense.

Many education savers have expressed concern about the potential tax consequences of overfunding their 529 plan accounts and removing excessive funds, according to Vincent Birardi, a wealth advisor at Halbert Hargrove Global Advisors in Long Beach, California, which ranked No. 54 on CNBC's FA 100.

"The new benefit that has generated the most excitement is the one we've seen," said Martha Kortiak Mert, chief operating officer at Saving For College.

""The barrier to entry is solved by this, opening up new possibilities and opportunities for what can be done with this kind of account," she stated."

There are still some limitations.

To be eligible for 529-to-Roth transfers, the 529 account must have been open for 15 years, and contributions made in the last five years cannot be rolled over. Additionally, rollovers are subject to the annual Roth IRA contribution limit, and there is a $35,000 lifetime cap on such transfers.

Total investments in 529s hit $508 billion

While financial experts and plan investors agree that 529 plans are a smart choice for many, data shows that regular contributions to a 529 college savings plan often took a back seat to paying more pressing bills or other priorities in previous years.

The high costs and worries about growing student loan debts have greatly influenced college decisions for students and their families.

This year, due to new changes, an increasing number of parents are using 529 college savings plans, with many making regular monthly and quarterly contributions.

The amount of investments in 529s increased by 12.9% in June 2024, reaching $508 billion from $450.5 billion in the previous year, as per data from the College Savings Plans Network.

How much you can contribute to a 529 plan

In 2023, individuals can gift up to $17,000, or up to $34,000 if you're married and file taxes jointly, per child without those contributions counting toward your lifetime gift tax exemption.

Grandparents can now contribute to their grandchild's college fund without affecting their financial aid eligibility, thanks to a new "loophole."

Consider "superfunding" 529 accounts for high-net-worth families looking to help fund a family member's higher education by frontloading five years' worth of tax-free gifts into a 529 plan.

You could contribute up to $90,000 in a single year or $180,000 for a married couple, but if you do, you won't be able to give more money to the same recipient within a five-year period without it affecting your lifetime gift tax exemption.

Fidelity suggests that a larger upfront lump-sum contribution may result in more earnings compared to the same size contribution spread out over several years due to the longer time horizon.