There are other options available to you; you could, for instance, change the beneficiary to another family member such as another child or even your spouse; or keep the funds within a 529 account to be used towards higher education expenses including graduate school tuition costs.
With Secure Act 2.0’s new feature of rolling funds into Roth IRAs, unused funds can also be put to good use by rolling them over into your personal Roth IRA account.
What is a 529 plan?
A 529 plan is a tax-advantaged savings account that you can use to prepay your children’s college tuition costs. Money in this account is invested in mutual funds that grow tax deferred; plus it qualifies for state income tax deductions or credits in 35 states plus DC.
Your 529 account’s funds may be used for qualified education expenses such as tuition, room and board, books, supplies, computers and software as well as certain technology and equipment purchases. Withdrawals made for non-qualified expenses will incur federal income taxes plus a 10% penalty on earnings portion of withdrawal.
Consider the long-term implications of rolling over 529 funds before making any decisions to do so. SmartAsset’s free tool connects you with up to three vetted advisors serving your area, where they offer free introductory calls so you can see if one fits with your individual requirements.
How can I rollover my 529 plan?
A 529 plan can be an invaluable way to save for your child’s education, providing beneficiaries with beneficiary flexibility, tax-deferred growth and tax-free withdrawals as long as used to pay qualified education expenses – not to mention any potential state tax deductions!
However, saving for college should not be your sole financial goal. Before setting your sights on saving for this investment goal, make sure all consumer debt has been paid off, work on creating an emergency fund, and invest 15% of your income into retirement accounts like Roth IRAs.
If you have already saved in a 529 plan and your child opts not to attend college or another type of institution, transferring the funds over into a Roth IRA for their use remains possible; just be mindful that there are certain rules you need to abide by: namely the annual Roth contribution limit is currently $35,000 as is rollover amount limits of that type of plan.
Can I rollover my 529 plan to a Roth IRA?
Families commonly save for their children’s education needs through 529 college savings plans, but what happens if they do not need all the funds? In the past, withdrawing any excess and paying income tax plus an additional 10% federal penalty was the only solution available to them. Thanks to the SECURE 2.0 Act (which will come into force in 2024), however, families may now roll those unused funds over into a Roth IRA instead.
There are, however, some restrictions. According to new rules, no more than $35,000 can be transferred per beneficiary at one time and the transferring account must be at least 15 years old.
Although these changes could benefit some, it’s essential to fully comprehend their limitations and potential drawbacks before making a decision. A financial advisor would also be wise in order to ensure this strategy fits your particular circumstances.
Can I rollover my 529 plan to a Traditional IRA?
Since this legislation is relatively new, it’s essential that you consult a financial or tax professional prior to pursuing this option. There are various factors to keep in mind such as unutilized funds, potential tax implications and retirement savings goals that need to be taken into consideration before taking this route.
If a beneficiary chooses not to use their 529 plan funds for college expenses or retirement savings, they can still save them with rolling the money over into an IRA account – although there may be restrictions: maximum rollover limit of $35,000 applies, annual Roth IRA contribution limits apply and account must have been open at least 15 years prior.
Importantly, changing the designated beneficiary of a 529 account restarts its 15-year clock, so it is wise to plan in advance before trying to change beneficiaries. You should also inquire with your state about any applicable regulations.
