How Unused 529 Plans Now Have Another Tax-Advantage Option

Desiree Kaul, CFP®

How Unused 529 Plans Now Have Another Tax-Advantage Option

Are you one of the few out there that might have saved too much for your child’s college into a tax-advantaged 529 savings plan? Not sure what to do with it now? I am sure you don’t want to take out the money for non-education expenses because then you will have to pay taxes and penalties. Um, no thank you.

Education 529 plans allow you to change beneficiaries, so if you have any other family members needing college funds, that should be your first option. But, if that isn’t an option, then beginning in 2024, because of changes within the Secure Act 2.0 beneficiaries of a 529 savings account can roll over their funds to a Roth IRA. Sounds great right? Hold tight for the fine print to ensure these transfers remain tax and penalty-free.

  • The 529 account must have been maintained for at least 15 years.
  • Any contributions made within the last 5 years can’t be moved.
  • The 529 beneficiary must have earned income in the year you transfer any assets. Again, this can be your child, or you can change the beneficiary to your name if you are the account owner. But whomever the beneficiary is, that’s who gets to roll over to the Roth IRA.
  • The maximum lifetime amount that can be rolled over is $35,000 and all transfers are subject to the annual IRS Roth IRA contribution limits. Meaning, that for each year you may only be able to roll up to $6,500 ($7,500 if the beneficiary is over 50 as of 2023) until you exhaust the lifetime limit.

Even if you have just begun saving for your child’s college education or have not even started to save this change couldn’t come at a better time. You can now save knowing that you have additional options if your child doesn’t use all the money for education expenses. There are so many what-ifs in life- what if they get scholarships or even a full ride? Wouldn’t that be amazing!

Honestly, the best part of this rule change is that if you save too much for your child’s education, they get their education paid for and a jump start on their retirement savings. But if you decide to pay yourself back instead and revert the beneficiary to yourself, I won’t tell. You already gave your child a great gift in education.

MainStreet Team
MainStreet Team

MainStreet Financial Planning, Inc., an independent fee-only financial planning firm was founded in Maryland in 2002 by Jim Ludwick, CFP® who passionately believed that financial planning advice should be accessible to people from all walks of life without product sales and investment management services. In 2006 Anna Sergunina, CFP® joined the team and together they grew MainStreet Financial to a nationally recognized company, with a team of 6 staff members and 5 offices across the country.

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