When Education Planning is Over: What To Do With That Leftover 529
By Stephanie Kelm
529 Plans have long been touted as a tax advantaged investment vehicle to save for a child’s education. 529s have great advantages, such as tax deferred growth and most states provide a tax break during the year of contribution.
When I speak to new parents, I often hear the question of “Should we set up a 529 account to save for our child’s education?” However, concerns creep in, such as the chance that the child doesn’t go to college. Or maybe that college costs will change in the next 18 years. Or they even fear running the risk of saving too much and college is paid for in a different way, such as scholarships.
On the other hand, there are times I sit with individuals that have 20+ year old children - that are done with their schooling - and did not end up utilizing all their 529 funds. They are then left with a decision: keep it for a different beneficiary someday or use the funds for a non-educational purpose and get hit with the 10% penalty. This, of course, causes a person to feel “stuck” with this money.
As if hearing these complaints, the government signed the SECURE Act 2.01, released at the end of last year, which included a provision for these 529 account funds that are “stuck”. The general rule is that starting in 2024, you can move some of the 529 account funds into a Roth IRA for the beneficiary. This sounds ideal, but with most general concepts, there are caveats.
The new rule says that if a 529 has been established for at least 15 years, funds can be moved from the 529 to a Roth IRA in the name of the beneficiary.
Some additional rules that are important to keep in mind2:
- Any contributions made to the 529 in the last five years cannot be included in this transaction.
- The beneficiary must have earned income in the year that you make the transaction.
- The amount that can be moved on an annual basis is equal to the Roth IRA contribution amount for that year. For example, in 2023 (if this was available), a maximum of $6,500 would be able to be moved over. This amount is all inclusive of any contributions to IRAs or Roth IRA for the beneficiary for the year.
- The income limit for Roth IRAs does not apply, so you can do the full maximum contribution even if the beneficiary’s income is over the Roth IRA phaseout amount.
- There is a maximum lifetime transaction limit of $35,000 from the 529 to the Roth IRA.
- What if you change the beneficiary? This is an unknown at this time and we hope that there will be clarification language soon regarding this.
With these stipulations, it is important to know that this is not a short-term planning strategy for clients. What this does do, is provide an outlet for unused 529 funds to continue to grow tax deferred. The tax deferred assets are simply transferred from the purpose of education planning to retirement planning for the beneficiary.
For further information on this topic and other changes to the tax law from Secure 2.0, please check out our previous blog posts and recorded webinar and as always, reach out to your advisor at RISE with any questions.
- U.S. Congress, House, Setting Every Community Up for Retirement Enhancement (SECURE Act 2.0) Act of 2022. 117th Cong., introduced in Senate December 2022, www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
- “SECURE Act 2.0: Later RMDs, 529-to-Roth Rollovers, and Other Tax Planning Opportunities.” (2022). Kitces.com. https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/
Advisory services offered through Rise Advisors, LLC (“Rise”), a Registered Investment Adviser. This report is being generated as a courtesy and is for informational purposes only.