529 plans are designed to assist families in saving for college. Their funds may be used for qualified education expenses like tuition fees and room and board costs as well as repaying student loans. Under SECURE Act 2.0 regulations, you are also able to roll unused 529 funds directly into a Roth IRA without penalty.
Fees
If your 529 plan contains funds that haven’t been spent on qualified education expenses, and are left unused, consider moving them over into a Roth IRA. However, be mindful that there may be restrictions; for instance, some states require you to remit any tax deductions related to withdrawal. It would also be wise to consult a tax adviser prior to making such a move.
Additionally, you must own the account for 15 years and cannot transfer contributions or earnings made within five years; any rollover amount must not exceed $35,000 per beneficiary and any transfers are subject to annual IRA contribution limits.
A 529 college savings plan offers many advantages to families, such as generous contribution maximums, parental control over accounts and investment flexibility. Unfortunately, however, these funds only qualify as tax-free when distributed for qualified educational expenses; nonqualified withdrawals incur taxes as well as an additional 10% federal penalty fee.
Taxes
A 529 account can be an excellent way to save for education, providing tax-deferred growth with withdrawals free from federal income taxes if used for qualifying education expenses. Many states also provide deductions or credits for contributions made directly into such plans. There are some restrictions associated with rolling over a 529 plan into an IRA plan – for instance, its owner must be the beneficiary in both accounts, and both must have been active for at least 15 years; no clarity from the IRS on whether such changes might reset this 15-year requirement.
If a beneficiary withdraws money from a 529 account for non-educational uses, they may incur taxes and a 10% penalty. To minimize these penalties and remain within Roth IRA contribution limits, professional advice should always be sought to avoid these penalties.
Eligibility
529 plans can be used to pay tuition at accredited two- and four-year colleges, vocational-technical schools and some vocational schools. Investors can use these funds for qualified educational expenses like room and board or K-12 tuition costs such as books and supplies for K-12 classes; additionally investors may make five years’ worth of gifts without incurring federal gift taxes.
However, several requirements must first be fulfilled for a 529 to be converted to an IRA. First of all, the account must have been open for at least 15 years with its beneficiary also acting as the owner of an IRA plan; additionally this requirement does not count any contributions or earnings made over the last five years.
Rollover rules provide an escape hatch for savers who overestimated how much college costs. When making this decision, individuals should consult with their tax advisor and read all plan disclosures thoroughly; state and local taxes may also apply if distributions from 529 accounts occur.
Investment options
Under new rules of the SECURE Act 2.0, 529 account owners can now transfer unused education funds into an IRA. There are certain restrictions when doing this; first of all, it must be made directly in the name of their beneficiary; contributions or earnings made within five years cannot be included; finally, earning income must at least equal or exceed that amount that was transferred over.
Before taking this step, it is advisable to seek guidance from a financial professional. The new rule provides beneficiaries with an opportunity to repurpose unused education savings accounts into long-term retirement growth assets while potentially reducing taxes and penalties.
