Rolling a 529 Into Something Else
A 529 college savings plan can be an invaluable tool for parents and grandparents looking to support their children or grandchildren with education expenses. Unfortunately, unutilized funds may sit idle due to scholarships or when children change schools.
Thanks to a new law, it’s now easier than ever to roll over these funds without incurring tax penalties. Here’s how.
Can You Roll It Into a Roth IRA?
If your child doesn’t attend college or is no longer using all the funds in his or her 529 plan, you can change its beneficiary. Any withdrawals for nonqualified expenses will incur income taxes as well as a 10% penalty tax on earnings.
Starting in 2024, the SECURE 2.0 Act allows unutilized 529 funds to be converted to Roth IRAs without incurring taxes or penalties, provided the beneficiary of said IRA meets certain criteria – for instance opening it under their own name with at least 15 years in an investment account underlying it and adhering to annual contribution limits for their Roth IRA account.
Saving for college should be a top financial goal, but right now your family may prioritize paying down consumer debt and creating an emergency fund before making that commitment to college savings.
Can You Roll It Into a Traditional IRA?
A 529 plan allows you to invest in various funds and save for education expenses. You can open one for yourself or your child, with beneficiaries changing as often as you’d like; they could include siblings, spouses, in-laws, aunts and uncles, grandchildren or nieces as beneficiaries or first cousins of the beneficiary.
Your investments grow tax-deferred, and withdrawals can be free from federal income taxes if used for eligible education expenses such as tuition, books and room and board. There is however a 10% penalty if any funds are withdrawn for nonqualified expenses.
Starting in 2024, a new law known as the Setting Every Community Up for Retirement Enhancement (Secure 2.0) Act allows you to move unused 529 assets directly into a Roth IRA without incurring a penalty or creating any taxable income. There are restrictions; for instance, contribution caps vary by state and account balance must not exceed $35,000 at time of rollover if you want to take advantage of this new option.
Can You Roll It Into a Brokerage Account?
Before making any major financial or tax decisions, it’s advisable to consult with both your financial planner and tax advisor. It may also be prudent to assess how any changes would impact financial aid applications; assets held within 529 plans are often considered parent-owned assets which reduce eligibility for tuition credits.
Additionally, rolling over an account may incur fees. Switching from a state 529 plan to a private investment account could incur extra charges. Furthermore, 529 accounts can only be rolled over once annually due to certain restrictions; parents with multiple 529s might benefit from consolidating them into one account for easier management and reduced fees. Lastly, check with your state to make sure they comply with federal rules regarding 529s – otherwise penalties could apply!
Can You Roll It Into a Savings Account?
Rollover and transfer of 529 plans are two distinct processes; while one involves moving funds between plans, while the other simply changes beneficiaries of an account. Understanding their respective benefits is essential.
If your current 529 plans have high fees, it could be worthwhile to rollover money to one with lower fees or consolidate assets among multiple state plans to reduce fees and maximize savings.
When moving to a state with tax deductions for 529 plan contributions, taking advantage of any savings is often worth doing a rollover. Just keep in mind that tax regulations surrounding distributions from 529 plans can be complex – you could face both federal and state income taxes plus a 10% penalty if any money from it is used for noneducational expenses.
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