A 529 plan is a tax-advantaged savings account designed to allow parents, other relatives, or anyone saving for the future education of their children to save more efficiently.
These funds must be spent on qualified educational expenses such as tuition, books and room and board at a college or university. Otherwise, you’ll owe ordinary income taxes plus an additional 10% penalty tax.
Why roll over?
A 529 plan provides an excellent way to save for a child’s education. You can use the money for college or K-12 tuition, plus some plans permit its use towards books or room and board expenses.
Saving for college can be challenging. Children often change their minds about where to study, leaving some parents worried that any savings that are set aside won’t actually be used towards tuition costs.
Beginning in 2024, it will be possible to save any unused funds in a 529 plan by rolling them over into a Roth IRA with no tax penalties attached.
This new provision, part of SECURE Act 2.0 legislation, is an incredible benefit to American families who save for college costs through 529 accounts and strengthens the trend of grandparents putting funds aside in such plans on behalf of their grandchildren.
What happens if I roll over?
Rollovers can be an effective way to optimize your savings plan, but it’s crucial that you first understand their rules and ramifications before deciding if one is appropriate or not.
If you have recently relocated to a state that provides tax benefits for contributions or are dissatisfied with your current 529 plan’s service, considering switching over may be worthwhile. Be sure to consult with a CPA or fiduciary financial advisor first, to make sure you’re getting maximum value out of any changes made prior to initiating one.
According to federal law, each beneficiary can only make one tax-free rollover per 12-month period without incurring a penalty tax bill. Please be aware that this rule only applies to individual beneficiaries and not plan owners.
Can I roll over more than once per year?
529 plans provide families a tax-efficient means of saving for college expenses for their children, by permitting investment earnings to accumulate tax-free while being exempted when used toward qualified education expenses such as tuition fees, books and room and board at eligible public, private or non-profit colleges and universities.
Tax benefits of savings plans may be offset by a 10% federal tax penalty on account distributions that aren’t used to cover qualified expenses. This leaves parents with money they could put to better use elsewhere.
Families who no longer require their 529 funds for education expenses might find rolling over those funds into Roth IRAs a more appealing solution. Federal law permits an individual to contribute up to $35,000 annually into one, making these accounts more cost-effective options than continuing them as 529s.
Can I roll over to a different state?
A 529 plan is an investment account that can help you save for the education of both your child and yourself, be it apprenticeship programs, private school tuition costs or returning to school as an adult.
As long as it meets certain requirements, 529 plans can be found in any state and may offer tax advantages. When choosing one in another state, compare plans that offer lower fees, more robust investment options or have high industry ratings before opening an account there.
Rollover your 529 plan into an ABLE account designed to assist families of people with disabilities pay for qualified expenses such as health care, travel and housing costs. This strategy may prove particularly helpful if your 529 account has already reached capacity and you need extra savings money for education savings.