Rolling a 529 Into Something Else

Next year, new regulations will make saving with 529 plans, an education savings account offered by state governments, even more attractive.

Current rules allow beneficiaries to transfer funds between 529 plans only once every 12 months, without incurring federal tax and penalty. Any additional transfers would be treated as non-qualified distributions subject to both taxation and penalty fees.

Taxes

A 529 investment account offers significant tax benefits, but it’s crucial that its money be spent for qualified expenses or else income taxes and a 10% penalty will apply.

Thank goodness there are more options than ever before for saving. With the new law eliminating many disadvantages of saving, and Thrivent helping you determine how best to use those funds.

Change the Beneficiary of a 529 Account Now You can change the beneficiary of a 529 to any eligible relative, such as parents, siblings and step siblings, grandparents, aunts/uncles/cousins etc. You could even convert it to a Roth IRA to provide more flexibility with how and when to spend the funds for retirement-related expenses.

Remember, however, that each beneficiary is only eligible for one tax-free rollover every 12 months and state rules may differ – working with a CPA or fiduciary financial advisor can help determine what would make the most sense in your unique circumstance.

Roth IRA

A 529 savings plan allows investors to invest tax-free into accounts that can be withdrawn tax-free to cover tuition and fees at qualifying universities, trade schools and apprenticeship programs; K-12 private education costs; student loan repayment. Furthermore, thanks to the 2024 Secure 2.0 Act’s ability for rollover funds into Roth individual retirement accounts unused funds will remain tax-free and accessible when needed.

A 529 offers limited investment choices and comes with steep penalties for non-qualified withdrawals, but can still provide an effective means of lowering college costs. Investors may even use 529s to cover postsecondary education in another state if that state offers no tax breaks or has high management fees; however, for optimal performance most parents and grandparents would prefer investing in their home state’s plan which typically provides substantial state income tax deductions.

Non-qualified distributions

If a beneficiary uses their 529 account funds for anything other than qualified higher education expenses, they will incur taxes and a 10% penalty. Unused amounts can be transferred into another 529 plan for another beneficiary or converted to a Roth IRA if certain requirements such as 15-year waiting periods are fulfilled.

The IRS allows one tax-free rollover per beneficiary every 12 months. Money may also be transferred between state 529 plans or to plans offered in another state such as Nevada’s Wealthfront College Savings Plan that offer federal income tax deductions for contributions.

Some states consider transfers between plans in their state to be investment reallocation and not rollover, which may affect the fee structure of your state plan. You can find information regarding fees at either College Savings Plans Network or your state department of education’s websites.

Other options

A 529 investment account allows individuals to save for future educational expenses tax-free by earning on investments that qualify as tuition, fees, books or room and board costs at qualifying institutions in the U.S. (or even some foreign universities). States typically offer these plans.

Investment options available to you include savings plans and prepaid tuition plans, with each offering its own set of advantages. Prepaid tuition plans lock in current tuition rates at specific schools while savings plans allow more diversification as they could potentially help finance multiple colleges or even graduate school tuition costs.

No matter the type of account, it’s advisable to keep in mind that children’s interests change over time and that any funds not needed for college could serve other purposes. New laws make it simpler than ever to switch unused 529 plans into Roth IRAs so the funds can be put towards retirement savings instead.


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