Sending your kids to college is usually a huge financial undertaking. Four years of tuition can easily cost over six figures, and then there’s room and board, books, a laptop, and more.

But what happens if you’ve been diligently saving up, using a tax-advantaged 529 plan like everyone recommends, and then your kid’s plans change? What if they decide to live at home, drop out, or not go to college at all? Or, what if by some miracle tuition gets cheaper over the next decade? Do you have to pay a penalty on the funds you don’t use for their education?

Thanks to a change in the tax rules this year, the answer doesn’t have to be no. Here’s what’s changed and why you can rest easier if it turns out you’ve set too much aside.

The Tax Benefits of 529 Plans

Let’s go back to basics for a second: There are tax incentives to building a savings for your kid’s education, just as there are for preparing for retirement.

If you invest money in a 529 plan, your earnings can grow and be used tax-free as long as the money is spent on qualified education expenses. In other words, you pay taxes on the money you put into the account, but not on any investment returns. This can make a big difference, considering just $100 a month in contributions can grow by an extra $5,000 if your investments return an average of 7% annually over 10 years.

(Note: It’s not just college tuition that qualifies. You can use it to send your child to Kindergarten if you wish, and to pay for room and board, books, school supplies, and even $10,000 of student loan repayments.)

What Has Changed?

Starting this year, if there are any leftover funds in a 529 college savings plan, they can be rolled over into a Roth IRA, a type of individual retirement account, for the same beneficiary.

There are some parameters on when that can be done (more on that in a moment) but generally speaking, here’s why that’s a big deal: If you withdraw funds from a 529 for a non-qualified expense, the money you make by investing it in a mutual fund or other investment is not only taxed as income, but assessed a 10% penalty. So unless you were to transfer the 529 to another beneficiary (like a sibling), there was previously no way to avoid losing some of the unused funds.

That put parents in a difficult position. If they underfunded their kids’ account, they missed out on the tax benefits. If they overfunded it, they’d be penalized.

Makes sense, then, that the 2024 rule change would be welcome news. A summer survey by Saving for College, the educational arm of the 529 provider Backer, showed 57% of parents and grandparent subscribers are more likely to increase their 529 plan contributions because of the rollover benefit. And the vast majority of the 14% who don’t already have a 529 said they are more likely to get one.

Some people have already begun shifting their money. In the first half of 2024, $100 million in assets from 15,000 529 plans were transferred to Roth IRA accounts, CNBC reported in October, citing figures from ISS Market Intelligence. For comparison, there were over 16 million accounts with nearly $500 billion in the first quarter of 2024, according to Saving for College.

Rollover Parameters and Limitations

There are some limitations on the rollovers, presumably meant to ensure 529s are still primarily a vehicle for saving for school:

•   In order to roll funds over, the 529 account must have been open for at least 15 years.

•   Rollover amounts can’t include contributions or earnings from the last five years.

•   You can’t roll over more than the annual Roth IRA contribution limits each year. In 2024, that limit is $7,000, or $8,000 for people 50 and older.

•   You can’t rollover more than $35,000 in total.

What This Means for You

Capitalizing on tax-advantaged investment accounts helps you leverage the power of compound returns — when your contributions and the investment returns from those contributions are earning money for you.

But unlike retirement accounts, where you can use the money for whatever you want, 529 plans require you to anticipate your costs for a very specific and sometimes unpredictable time in your child’s life. This new rollover option essentially removes some of the guesswork in that equation.

A few things to remember: The earlier you start a 529, the more time the money has to grow. Unlike IRAs or 401(k)s, 529 plans are not subject to annual contribution limits, so you can set aside as much as you can afford. Plus, anyone can contribute, so spread the word to close friends, godparents, and other family members.

image credit: Bernie Pesko

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

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The Final Countdown

Investors are approaching what has historically been one of the most predictable and positive periods of the year for the stock market. The so-called “Santa Claus Rally” isn’t just a catchy phrase—it’s a well-documented phenomenon that has generally delivered positive returns for patient investors in the past.

The reasons behind the usual year-end market strength are multifaceted, and not totally clear. For one, trading volumes tend to thin out during this time, as many market participants wind down for the holidays, which can mean that the trading activity that does take place amplifies price action. And when you combine that with the ever-increasing flows that come from passive investing, automated contributions from retirement plans, and robo advisors, it’s not surprising that stocks tend to rise.

This year’s final stretch comes with an added layer of intrigue in the form of the upcoming Federal Reserve meeting. While the actual monetary policy decision is pretty much baked in (with the chances of another rate cut at more than 90%, according to the CME’s FedWatch tool), there’s some uncertainty around what the central bank’s quarterly projections will show. And while the Fed isn’t in the habit of surprising markets, it wouldn’t be unprecedented for the final update of the year to shake things up.

Economic and Earnings Calendar

Monday

•   December Empire State Manufacturing Activity: The New York Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   December S&P Global US PMIs: These indexes track how purchasing managers across different industries feel about the business environment.

Tuesday

•   November Retail Sales: This measures spending at retail stores and is a key indicator of consumer demand.

•   December New York Services Activity: The New York Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   November Industrial Production and Capacity Utilization: The industrial sector accounts for much of the cyclical swings in economic activity.

•   December NAHB Housing Market Index: This index tracks how homebuilders feel about the current and future state of the single-family housing market.

Wednesday

•   November Building Permits and Housing Starts: Construction data is a leading indicator of economic activity.

•   FOMC Interest Rate Decision: The Federal Reserve will announce any changes to monetary policy after the conclusion of its two-day FOMC meeting, in addition to providing commentary on the economy. It’s one of eight regularly scheduled meetings per year.

•   Weekly Mortgage Applications: Mortgage activity gives insight on demand conditions in the housing market.

•   Earnings: General Mills, Jabil, Lennar, Micron Technology

Thursday

•   3Q GDP, Third Estimate: The primary measure of economic activity in the United States, which is measured as total expenditure on a country’s goods and services.

•   December Philadelphia Fed Manufacturing Activity: The Philadelphia Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   November Leading Economic Index: This is an index composed of various economic indicators that have historically led changes in the broader economy.

•   November Existing Home Sales: Most home transactions in any given month tend to come from the existing market, and as a result set the tone for the broader housing market.

•   December Kansas City Fed Manufacturing Activity: The Kansas City Fed’s survey of manufacturing executives in the region on business conditions and their outlook.

•   Weekly Jobless Claims: This high frequency labor market data gives insight into filings for unemployment benefits. Jobless claims have continued to show a labor market that remains strong despite having cooled.

•   Earnings: Accenture, Conagra Brands, Cintas, Darden Restaurants, FactSet Research Systems, FedEx, CarMax, Nike, Paychex

Friday

•   November Personal Income and Spending: These numbers give insight into how Americans are doing, which is important since consumer spending accounts for about two-thirds of economic growth in the United States.

•   November Personal Consumption Expenditures Price Index: The Fed targets this inflation measure for its price stability mandate and believes PCE to be the best measure of consumers’ spending habits.

•   December University of Michigan Consumer Sentiment: How consumers feel about economic conditions affect their spending habits. This survey places a particular focus on inflation and its trajectory.

•   December Kansas City Fed Non-Manufacturing Activity: The Kansas City Fed’s survey of services executives in the region on business conditions and their outlook.

•   Earnings: Carnival

Looking for more stories like this? Check out On the Money — SoFi’s one-stop-shop for news, trends, and tips!

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Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn't recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

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When investors talk about how the stock market is doing, they’re often referring to one of the benchmark stock indexes. You have probably heard of some of the most well-known ones, such as the Dow Jones Industrial Average, which has been around since 1896, or the S&P 500, which is the broadest measure of the U.S. stock market. You may have even heard that both have risen to record highs this year or that chip maker nvidia bumped Intel from the Dow, ending the tech giant’s 25-year run in the index by better leveraging the artificial intelligence boom.

But what exactly are stock indexes and how do investors use them? We’re getting into it.

Stock Indexes Versus the Economy

Stock indexes track the combined performance of a specific group of stocks. They’re designed to be representative of a certain section of the market and can give investors a sense of how stocks are broadly responding to economic data, changes in regulations and trade policies, or the political climate.

But no, the stock market and the economy aren’t the same, in case you were wondering. They are interconnected, given that the economy is a measure of things that are made, bought, and sold in a given region, and the stock market reflects a critical aspect of the companies that do the making, buying and selling. But they can diverge in noticeable ways. For example, even when the economy is doing well, investor worries about a slowdown in the future can pull stock prices lower.

Two Key Indexes to Remember

One of the most cited indexes is the Dow, which measures the performance of 30 large, publicly traded U.S. companies. It’s measured in points, so you’ll often hear how many points the Dow went up or down in a given day or week. By tracking how these businesses are faring, market watchers may gauge (and infer) how the stock market is doing as a whole. The Dow is a price-weighted average, meaning stocks with a higher share price can influence the index more. The highest-weighted Dow stocks were Wall Street bank Goldman Sachs, insurer UnitedHealth Group, and retailer Home Depot as of December 6, 2024.

The other very prominent stock index is the S&P 500, which tracks a much bigger chunk of the market by following 500 leading, publicly trading U.S. companies. The S&P 500 is weighted by market value rather than share price. Even though all sectors are represented, big tech reigns the index, with Apple, Meta, Google-parent Alphabet, Microsoft, and NVIDIA among the top 10 biggest constituents.

While the Dow is often the most cited index, the S&P 500 can provide a broader, more diverse view of overall market health.

And there are a multitude of other stock indexes tracking different parts of global financial markets. In the U.S., the Nasdaq Composite Index, which focuses on tech stocks, and the Russell 2000 Index, which tracks smaller companies, are also commonly cited.

How Can Stock Indexes Inform Your Investments?

Indexes can help investors understand the overall market sentiment, but they can also offer a point of comparison. For instance, if an investor wants to understand how a specific stock or investment is faring versus the overall market, they might compare it to the S&P 500’s long-term return of roughly 10% (or 6-7% when adjusted for inflation), according to historical data.

You can also base your investments on indexes through investment funds, such as exchange-traded funds (ETFs). These funds allow you to invest in all the stocks in an index rather than purchasing individual securities. If you’re saving for the long-term, such as for your retirement, using average historical market returns can also help you project how much your investments could potentially grow over time.

image credit: Bernie Pesko

photocredit: iStock/Prostock-Studio

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.

SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

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