How an Unused 529 Plan Was Added Another Tax Benefit Option
March 22, 2023
Are you one of the few who saved too much on a tax-efficient 529 savings plan for your kid’s college? Not sure what to do with it now?i’m sure you don’t want to take the money non– Education costs because you have to pay taxes and fines. No, thank you.
The Education 529 plan allows you to change beneficiaries, so if you have other family members who need college funding, it’s your first option. But if that’s not possible, changes to the Secure Act 2.0 will allow 529 savings account beneficiaries to roll over their funds to a Roth IRA, starting in 2024. Sounds good. Please hold on to the fine print to ensure that these transfers are free of taxes and penalties.
- 529 Accounts must be maintained for at least 15 years.
- Donations made in the last 5 years cannot be moved.
- 529 beneficiary must be earning income in the year in which the property is transferred. Again, this can be your child or you can change the recipient to your name if you are the account holder. However, whoever the beneficiary is, it is he/she who can roll over to the Roth IRA.
- The lifetime maximum amount that can be rolled over is $35,000, and all transfers are subject to the annual IRS Roth IRA contribution limits. That means you could potentially roll up to $6,500 each year (if the beneficiary is over 50 in 2023, he’s $7,500) until you’ve exhausted your lifetime limit.
Whether you’re just starting to save for your child’s college education or haven’t started saving yet, this change couldn’t have been better. If your kids don’t spend all their money on education, you can save money by knowing there are additional options. There are so many what-ifs in life. What if they got a scholarship or a full ride? Wouldn’t that be great?
Honestly, the best thing about this rule change is that if you save too much for your child’s education, your education will be paid for and your retirement savings will start immediately. But if instead you decide to repay yourself and return the beneficiary to yourself, I say no. You have already given your child the wonderful gift of an education.