A big question many families have before opening a 529 plan is: What happens if my child doesn’t use the funds for education expenses?

Thanks to SECURE 2.0 a new transfer provision allows us to avoid income tax and penalties associated with money coming out of a 529 plan as a non-qualified withdrawal. Starting in 2024.

These situations occur often due to scholarships, money left over, or kids going in another direction. Now you can take that unused money and create a Roth IRA for your child.

DETAILS:

– $35,000 lifetime limit on transfers/rollovers

– You can’t rollover more than annual Roth IRA contribution ($6,500) limit each year. The 529 plan beneficiary must also have earned income in order to make a rollover contribution.

– Can only be made to the beneficiaries Roth, not to the owner’s

– Must be open for at least 15 years, and no contributions that haven’t been in the account for at least 5 years can be moved.

This is a thoughtful and welcome change that will benefit many families.

#financialplanning #529plan #investing #collegeplanning #education

Justin Holtz is a CERTIFIED FINANCIAL PLANNER™ who specializes in helping people make the most out of their money.

Clients choose to work with Justin because they are looking for a straight-forward, relatable, and easy-to-understand approach.

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The 529 plan is a popular savings vehicle that allows families to save tax-free for their child’s educational expenses. However, not everyone knows that they can transfer their funds from a 529 plan into a Roth IRA. While this may seem like an appealing option for some, it’s important to understand the rules and potential drawbacks before making any moves.

First, let’s go over the basics of each plan. A 529 plan is specifically designed for education savings; contributions are made with after-tax dollars, but the earnings grow tax-free and can be withdrawn tax-free as long as they’re used for qualified educational expenses. There are no income limitations for contributing to a 529 plan, and many states offer tax incentives for residents who do so.

On the other hand, a Roth IRA is a retirement account that also grows tax-free, but contributions are made with after-tax dollars and withdrawals are tax-free in retirement. There are income limitations for contributing to a Roth IRA, and the contribution limit is currently $6,000 per year for those under age 50. Unlike a 529 plan, there are no specific restrictions on how the funds can be used in retirement.

So, why would someone consider transferring funds from a 529 plan to a Roth IRA? One reason could be if a family is fortunate enough to not need all of their 529 savings for educational expenses, and they want to have more flexibility with how they use the funds. By transferring the funds to a Roth IRA, they could potentially access the funds tax-free in retirement for any purpose.

However, there are some rules and potential drawbacks to keep in mind. First of all, not all 529 plans allow for transfers to a Roth IRA, so it’s important to check with your plan administrator. If it is allowed, the transfer must be done as a rollover, meaning the funds must be transferred directly from one account to the other. If the funds are withdrawn from the 529 plan and then deposited into a Roth IRA, there could be tax consequences and penalties.

Additionally, any earnings that have accrued in the 529 plan will be subject to income tax and a 10% penalty if they’re not used for qualified educational expenses. So, if someone transfers their entire 529 balance to a Roth IRA but doesn’t use the funds for education, they could be hit with a big tax bill.

Finally, it’s important to consider the impact on financial aid eligibility. 529 plan funds are typically not counted as assets for financial aid purposes, but Roth IRA funds are. Transferring funds from a 529 plan to a Roth IRA could potentially reduce a student’s eligibility for need-based aid.

In conclusion, transferring funds from a 529 plan to a Roth IRA can be a smart move for some families, but it’s important to understand the rules and potential drawbacks before making any decisions. Consult with a financial advisor before proceeding to ensure you’re making the best choice for your unique financial situation.