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Maximize Your 529 Plan: New Rules and Smart Strategies

Your in-laws generously funded a 529 account to support your child’s education. However, if your child opts for a less expensive state school, you might wonder how to use the leftover funds without incurring penalties and taxes. Fortunately, new rules now allow you to roll over unused 529 plan funds into a Roth IRA for the same beneficiary.

Understanding the New 529 Plan Rules

A 529 plan is a tax-advantaged investment account designed to help families save for educational expenses. Typically, a parent or grandparent opens a 529 account for a child or grandchild. With the new rules, you can now roll over up to $35,000 in unused 529 plan funds into a Roth IRA for the beneficiary, starting January 1, 2024.

Qualifying Educational Expenses

Currently, 529 plan funds can be used for:

• College or postgraduate tuition, room and board, fees, books, equipment, and supplies
• Certain apprenticeship, vocational, or trade programs
• Up to $10,000 of K-12 private school tuition annually
• Repaying up to $10,000 in qualifying student loans for the beneficiary or a sibling

Using 529 funds for non-qualifying expenses results in a 10% penalty and taxes on earnings. However, the SECURE 2.0 Act has eased these restrictions, allowing for rollovers to Roth IRAs.

How to Roll Over Unused 529 Plan Funds

Before rolling over funds, ensure your plan and beneficiary meet these requirements:

• The 529 plan must be open for at least 15 years.
• The Roth IRA must be in the beneficiary’s name.
• Contributions made in the past five years, and their earnings, cannot be rolled over.
• Annual IRA contributions, including rollovers, cannot exceed the annual limit ($6,500 for 2023, $7,500 for those 50 and over).
• The beneficiary must have earned taxable income that year.

To proceed with the rollover:

1. Contact the financial institution holding your 529 plan to confirm eligibility.
2. Select and open a Roth IRA in the beneficiary’s name.
3. Arrange for the rollover, ensuring funds are transferred directly to avoid penalties.
4. Decide how to invest the Roth IRA funds.
5. Continue rolling over funds annually until reaching the $35,000 limit.

Is Rolling Over Unused 529 Plan Funds a Smart Move?

Unused 529 plan funds don’t expire, so you won’t lose the money. However, rolling over to a Roth IRA can offer several benefits:

Pros

• Jump-start the beneficiary’s retirement savings.
• Reduce the responsibility of managing an unused 529 account.
• Roth IRA funds can be used for more than just retirement, such as a down payment on a first home.

Cons

• The nature of your savings will change, potentially affecting future educational funding.
• You may need to find other sources for educational expenses if needed later.

The Bottom Line

A 529 plan is an excellent way to save for education while enjoying tax benefits. However, life changes can leave you with excess funds. Rolling over unused 529 money to a Roth IRA can help the beneficiary build wealth and save for retirement, providing a financial advantage as they enter adulthood.

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