Most of you have heard of the 529 college savings plans to help pay the astronomically rising costs of college today. Maybe you set up a 529 plan for your kids or grandkids when they were first born and as they get older, they may have taken a different path and decided not to go to school? Now what do you do with the account? Normally, if you don't use the money to pay for costs associated with higher education, such as room and board, tuition and fees, books, etc., there could be a 10% penalty on the accumulated interest earned along with ordinary income tax. Well, the SECURE Act has made some radical changes to 529 plans allowing funds to be used to pay off a student loan, tax and penalty free, up to $10,000 for yourself, your children, grandchildren or spouse.
Another big change to 529 plan rules, is that you can rollover unused 529 funds to a Roth IRA for retirement.
If you recall, the Roth IRA can be invested in many types of investments, such as stocks, bonds, mutual funds, annuities, CD's and possibly even real estate. The money grows tax deferred and if the rules are followed can be utilized completely tax free for retirement! Here are a few of the rules that you'll need to follow to qualify for a roll-over to a Roth...
- The 529 plan must have been open for at least 15 years.
- The Roth IRA owner must be owned by the same beneficiary as the 529 plan.
- Contributions and earnings made to the 529 plan within the last 5 years are not eligible for a rollover to a Roth IRA.
- The annual rollover amount is limited to the annual Roth IRA contribution limit. For 2025, that amount is $7,000 with a total lifetime cap of $35,000.
- Funds coming from the 529 plan must be transferred directly from one firm to another via a trustee-to-trustee transfer. You can't first cash in the 529 plan and then reinvest in the Roth without incurring the early withdrawal penalties.
These new rules make it much more advantageous to set up a 529 plan, even if they don't attend college, knowing you can help your kids or grandkids, get on track to saving for retirement. If you have an old 529 plan that needs to be dusted off and you think a Roth IRA roll-over might make sense, give us a call.