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From Education to Retirement: Using 529 Plans to Enhance Retirement Planning

June 14, 2023

Diane Kotkin

For parents, saving for their child’s college education is always a concern. A 529 education savings account has been a popular vehicle to invest funds and enjoy tax benefits when used to pay for qualified education expenses for a designated beneficiary.  But what happens if your child decides not to go to college?  Or, what if they receive a scholarship and you have more than you need in your 529 account?  Normally your options would be limited:  You can transfer it to another qualifying family member; you can use up to $10,000 to pay off existing student loans or you can withdraw it and pay federal income tax and a 10% penalty.

On December 29, 2022, the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0) was signed into law. The Act contained more than 90 provisions designed to strengthen the retirement savings system by extending and expanding savings opportunities and easing administrative requirements. One of those provisions relates to 529 plans.  Beginning in 2024,a 529 plan beneficiary can transfer 529 plan funds into their own Roth IRA without paying taxes or penalties. Of course, there are rules. Some of these rules are: (1) the maximum amount to rollover is $35,000, (2) the rollovers are subject to Roth IRA annual contribution limits, and (3) the 529 plan must have been open for a minimum of 15 years. Also, contributions made in the last 5years to a 529 plan are ineligible for the tax-free transfer and the child must have earned income to be eligible for these Roth IRA contributions, perhaps from a part-time or summer job. 

While there is still a lot to understand about this law, there can be some potential benefits. For example, a parent or grandparent can fund a 529 plan when their child or grandchild is born. Once the 529 account has been in existence for 15 years–for example at the child’s 16th birthday–the parents or grandparents could begin to move 529 money into a Roth IRA for the child, up to the annual maximum IRA contribution limit. This annual transfer could continue each year until the $35,000 lifetime rollover limit is reached. Since the Roth IRA is being established at an early age, a substantial amount could accumulate by the time the child reaches retirement, especially if they continue to contribute to it throughout their lifetime.

If you have unused funds in your 529 plan and think this strategy can benefit you and your loved ones, please contact us so we can guide and help you get the maximum benefit.

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