Saving for your child’s college education is smart, especially when you can get tax advantages with a 529 plan.
But what happens when life changes, and your child doesn’t go to college or use all the funds? This is a concern many parents have and is what stops them from saving in a 529 plan.
Thanks to the Secure 2.0 Act, you don’t have to worry about losing the funds or paying a penalty. Instead, you can now roll the funds over into a Roth IRA for your child, making it easier to save for your child’s future, no matter what it holds.
The New Roth IRA Conversion Rule
Before the Secure 2.0 Act, any funds not used for qualified educational funds were subject to a 10% penalty, plus federal and state income taxes.
It was quite a hit for parents who so carefully invested/saved for their child’s education. But starting in 2024, parents can roll the funds into a Roth IRA in the beneficiary’s name. This allows parents to set children up for their future, no matter their path.
Of course, there are a few limits:
- You can only roll over up to the maximum IRA contribution limit for the year ($6,500 for 2023)
- You can only roll over up to $35,000 total for your child’s lifetime
- Any funds rolled over must be seasoned for at least five years
When can Rollovers Begin?
Rollovers can begin on December 31, 2023. So starting next year, you can roll over funds that have been in your child’s 529 for at least five years and if you’ve had the account for at least 15 years.
If you took advantage of changing beneficiaries for the account to use more funds, the 15-year clock restarts.
Whose Retirement Account is It?
The funds you roll over aren’t for your retirement account. Instead, you may only roll the funds over into a Roth IRA in the original beneficiary’s name.
The good news is you’re setting your child up for retirement by providing tax-advantaged funds. As long as the funds are in the account for at least five years, your child can withdraw the funds during his/her retirement tax-free.
The only exceptions to the rule are if your child buys his/her first house or becomes disabled. Under those circumstances, he/she can withdraw the funds early and not pay taxes or the 10% penalty.
Final Thoughts
The ability to convert 529 savings plans to a Roth IRA may encourage more parents to save for their child’s college education. Before the Secure 2.0 Act, parents were penalized for saving for college if their child didn’t use the funds.
The ability to convert the funds saves parents money and allows them to help their children in life, even if it’s not college. Of course, not everyone goes to college, and that’s okay. Now parents know the funds will be put to good use, whether their child goes to college or not. Either way, you’re setting them up for life.