Contributions to 529 college savings programs fell late last year and early this year, according to industry data, as consumers saved less overall and battled high inflation. But contributions seemed to be picking up in recent months.

State-sponsored savings accounts, named for a section of the tax code, can be used to pay for education expenses, primarily college costs. Money deposited into accounts grows tax-free and is withdrawn tax-free when spent on eligible expenses like tuition, room and board, and books.

In the first three months of the year, estimated net inflows to 529 savings plans (contributions minus withdrawals) totaled $1.6 billion, down from more than $3 billion a year earlier. according to ISS Market Intelligence, a financial research and analysis firm. Still, that was an improvement from the fourth quarter of 2022, when net inflows were $1.5 billion. And those fourth-quarter inflows were significantly lower than the more than $4 billion in the same period in 2021.

The drop in contributions was the result not only of shrinking overall savings and high inflation, but also of the reopening of the economy after the pandemic, which released pent-up demand for spending, Paul Curley said in an email. , director of savings research at ISS.

It didn’t help that last year was a lousy year for investors, including those with money in 529 plans. Losses in 529 plans hit families with children already enrolled or just starting college with little time to spend. recover their properties.

“People can contribute less when they feel less wealthy,” said Pam Lucina, director of trust at Northern Trust, a financial services firm.

Stock market gains this year, coupled with slowing inflation, have encouraged families to invest more money in 529 plans, Curley said.

Rachel Biar, president of the College Savings Plans Network, a group of state 529 plan administrators, said last year “was a challenging year.” But she added: “We see contributions coming back.”

Contributions to Nebraska’s 529 plan, for example, which Ms. Biar oversees as assistant state treasurer, have rebounded to almost the same levels as a year ago, she said.

Even with market volatility, Joel Dickson, Vanguard’s global head of advisory methodology, said the fundamental value of the 529 as a tax-advantaged form of education savings hasn’t changed.

“It still makes a lot of sense,” he said.

At Edward Jones, the annual survey shows that while respondents want to save for college, two in three don’t know what a 529 plan is, said Steve Rueschhoff, the company’s director of managed investments.

Total 529 plan assets, which reflect deposits and investment earnings, reached nearly $409 billion in the first quarter of this year, down from $432 billion a year earlier, but up more than 5 percent from the $388 billion by the end of 2022.

Despite recent market fluctuations, 529 plans offer a way for families to reduce the amount they have to borrow for college, Ms. Biar said. The College Board estimates that the average annual cost in the state to attend a public four-year university is $27,940, while the cost to attend a private non-profit four-year university is $57,570.

“We still want people to consider a 529,” Ms. Biar said, adding that most plans have conservative options, including federally insured savings accounts, for people who can’t tolerate risk.

The College Savings Plans Network has been working to increase awareness of college savings plans and has promoted legislation that expands the allowable uses for 529 funds. Congress, for example, has expanded the allowable use of the 529 funds to allow families to save for educational expenses other than college costs, such as tuition for kindergarten through grade 12, as well as apprenticeships. Plus, up to $10,000 of a 529 can now be used to pay off student loans.

Starting next year, under the Secure 2.0 Act enacted in 2022, “leftover” funds in a 529 plan can be rolled over to a Roth individual retirement account for the 529 beneficiary. This is helpful, Ms. Lucina said, because some families may refuse to contribute to a 529 for fear of owing taxes and a penalty if they have not spent all the funds in the account, for example, because their child is not going to college, and they withdraw the money for other purposes.

“People worry about the overfunding of 529,” he said.

Under the new law, up to $35,000 can be transferred from a 529 account to a Roth IRA. You can roll over up to the maximum annual Roth contribution, currently $6,500 for people under age 50, each year. If you have more left over, you will have to roll it over over a period of years.

Other rules apply: the 529 account, for example, must have been open for at least 15 years, and you can’t roll over contributions or earnings from the last five years.

Still, if you don’t meet the rules for a Roth rollover, you can avoid paying taxes and penalties by changing the beneficiary of the 529 account to a sibling or other family member.

With Roth IRAs, you contribute money after taxes; you don’t get a tax deduction like you do with a traditional IRA. But when you withdraw money, you usually don’t have to pay taxes on the earnings.

“Start healthy habits of contributing to a retirement account,” said Ms. Lucina.

Here are some questions and answers about 529 college plans:

Can I get a tax deduction for contributing money to a 529?

There is no federal tax deduction for 529 contributions, but many states offer tax breaks.

Do states offer incentives to open and fund a 529 plan?

Every May, many 529 plans offer promotions and prizes to encourage families to open accounts and start saving for college. South Carolina, for example, is offering $529 grants to parents of babies born in the state on May 29 to fund new FutureScholar 529 accounts. And California is offering a $100 bonus to families who open a ScholarShare 529 account May 22-31. of May. A list of state promotions is available from the College Savings Plans Network. website.

What happens if my 529 account loses money when my child enters college?

One option is to consider using other funds, perhaps taking out student loans, to pay for the first few years on campus, giving the 529 shares time to recover for later years of college or graduate school. said Mrs. Biar. Potentially, she could repay up to $10,000 in loans using 529 funds.