02/13/24 09:10 AM EST

Tight Disposable Income Squeezing College Savings

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Until recently, 529 savings plans have been championed as the optimal route for college savings. However, the requirement that funds must be used for specific education-related expenses posed a psychological hurdle for many savers, deterring broader adoption despite the allowances for various educational paths and even student loan payments. From 2024, thanks to legislative changes, families have the opportunity to transfer unused 529 funds to Roth IRAs without incurring income tax or penalties. This move addresses a common concern about the potential for unused education funds by offering a retirement savings option.

The appeal of 529 plans has been reinforced by tax benefits in some states, along with perks like scholarships or grants. Despite this, investments in these plans dipped to $411 billion in 2022, a drop from the previous year, as immediate financial obligations took precedence. The decision-making of potential college students also shifted, with some foregoing higher education or choosing more affordable local options. With the new provisions (Secure 2.0 Omnibus Appropriations Bill), 529s are gaining versatility, allowing for fund transfers to other beneficiaries or, now, conversion to Roth IRAs if the funds are not needed for educational expenses. Although there are still some conditions, such as a 15-year account opening requirement and a $35,000 lifetime cap on rollovers, the changes are expected to revitalize 529 plan usage. The ability to potentially grow a $35,000 Roth IRA investment into a substantial retirement fund is a compelling reason to reconsider the role of 529 plans in long-term financial planning.

It will be interesting if this rule change for 2024 stimulates new flows into 529 plans; so far, it hasn’t. Perhaps more of a reflection on tightening disposable income.

Learn more about the Market Situation Report written by Tier 1 Alpha.