A 529 plan allows parents to save for their children’s education with ease. You retain control of your money, while an appointed state manager invests it on your behalf using age-based or static portfolios.
Your account can be transferred without penalty to other family members such as spouses; siblings; first cousins and their descendants. Nonqualified withdrawals may incur taxes and a 10% penalty fee.
Qualifications
Beginning in 2024, savers with WA529 GET and DreamAhead accounts can transfer any unused funds directly into the beneficiary’s Roth IRA without incurring federal penalty taxes. This new feature adds another level of flexibility offered by 529 plans, such as tuition, room and board expenses as well as mandatory fees; computer equipment and related technology as well as internet services; books, supplies and equipment related to enrollment or class schedule; principal and interest payment on qualified student loans – to name just some uses of funds that have accumulated within them.
The new rule, included in the SECURE 2.0 Act of 2022, can provide relief to parents concerned about what to do with excess 529 assets in case their child receives a scholarship, chooses not to attend college, or opts for lower-cost schools. Furthermore, it could assist individuals who wish to fund Roth accounts during years when income exceeds limits necessary to contribute to 529s.
Taxes
At present, the federal government allows you to roll over up to $35,000 from a 529 plan into a Roth IRA; however, certain restrictions must be observed such as having been open for at least 15 years and no contributions (including earnings) made since 2005; additionally you must own and exceed your annual Roth contribution limit during this year of rollover; it would also be wise to consult a tax professional as well as review state laws regarding 529-Roth rollovers before taking this step.
With a traditional 529 plan, earnings accrue tax-deferred until distributed for qualified educational expenses. If funds are used for non-qualified expenses instead, they’re subject to normal income taxes and potentially subject to an additional 10% penalty tax; you can avoid this fee if rolling them over into a Roth IRA – though you must do it through trustee-to-trustee transfer only.
Withdrawals
Under the SECURE 2.0 Act, 529 account owners may withdraw funds up to an annual lifetime limit of $35,000 without incurring federal income taxes or a 10% penalty. Qualifying expenses include tuition; room and board; mandatory fees; books; computer equipment/technology related internet services/internet service providers/computing related services as well as any educational costs for graduate school education of future grandchild education payments and payments on qualified student loans made by beneficiaries themselves or their siblings.
As this strategy can be complex and professional guidance should be sought, withdrawals must come from an original 529 plan account and must have been in the account for at least 15 years before rolling them over into an IRA; thus the rollover process could take years before completion. Furthermore, any total amount withdrawn must not exceed your annual contribution limit to avoid tax penalties and charges on future withdrawals from this account.
Options
A 529 plan offers several advantages over other investment strategies, including tax-free distributions for qualified college expenses and generous contribution limits. Investors also enjoy control of their account as they can change beneficiaries as needed.
The SECURE 2.0 Act brought greater flexibility for 529 savings plans, enabling parents and guardians to move unused funds into Roth IRAs without incurring the 10% penalty or having them counted as taxable income. But before going this route, certain restrictions must be considered first.
First, your 529 account must have been owned for 15 years or longer before initiating a rollover to a Roth IRA. Next, this transfer should occur through direct trustee-to-trustee transfer of assets between accounts; thirdly, only unutilized contributions and earnings up to an annual lifetime limit of $35,000 can be moved per beneficiary. To find out more information regarding rules and restrictions when considering rolling over 529 assets into Roth IRAs consult a financial professional.
