Do you have 529 college savings funds that may go unused by their intended beneficiary?
Your first option is to provide the money to another beneficiary. However, if you don’t have an alternate beneficiary to whom you want to transfer the funds, you could be left with the unsatisfactory option of liquidating the account and facing taxes and possible penalties on any earnings. This is a result of not using the money for qualified education expenses.
But recently, there’s been good news for individuals in this predicament. The SECURE Act 2.0 that was recently passed may have added another option for some individuals – transfer unused college savings to a Roth IRA.
This provision, effective in 2024, will obviously be intriguing, especially for those with unused funds in their college savings plans. However, there are several conditions required to execute this kind of transfer:
- The receiving Roth IRA must be owned by the beneficiary of the 529 from which the money is sent. A 529 beneficiary can always be changed, so this is not a major hurdle.
- In order to be eligible to transfer funds to a Roth IRA, the 529 must be maintained for at least 15 years.
- 529 contributions made within the last five years are not eligible to transfer to a Roth IRA. Both this condition and #2 above highlight the true purpose of this provision, which is to allow an alternative for surplus college savings, not a loophole to save more into a Roth IRA.
- The annual limit for these transfers is the annual Roth IRA contribution limit less any regular contributions made. This prevents doubling up on contributions. However, if a child or parent is not eligible to contribute to a Roth IRA based on earnings, this is a way in which to continue tax-deferred growth.
- The lifetime maximum for transfers from a 529 to a Roth IRA is $35,000.
Again, we have another year before this is effective, but it’s worth looking at this as a way to continue to benefit a child by jump-starting their retirement savings. It’s good to have another option when money saved for specific option is not used for its original purpose.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.