529 College Savings Money Can Be Used For Retirement Now Too

A Big Change Was just OK’d For 529 College Savings Plans

As a longtime financial advisor, and a parent of three, I get it. The stresses of college planning and then paying for it, are huge.

In fact, if you’re reading this article, you’ve probably even wondered:

• Did I start saving too late?
• Am I saving enough?
• What if my kid gets scholarships galore and doesn’t need the money we saved? What about the penalties?
• Should I even use a 529 college savings account? Maybe just a savings account will do – so we have more flexibility?
• What if my kid just doesn’t go to college? I mean, plenty of brilliant people dropped out?
• What if YouTube is going to start handing out diplomas?

Federally-governed “529” plans have long offered families a tax-advantaged way to save for their children’s future college expenses. But any money not used for qualified higher education costs was taxed and penalized, leading some taxpayers to underfund their children’s accounts, or to avoid setting up a 529 plan altogether.

Winnie Sun, financial advisor at Sun Group Wealth Partners discussed the new rules for 529 College Savings Accounts on Good Day Los Angeles

Congress sought to ease those concerns with a major federal income tax code change enacted late last year that allows at least some of the “leftover” college funds to be rolled over, tax-free, into a Roth IRA, starting in 2024. The change is being hailed as a big benefit aimed at easing fears about the negative financial impact of not spending 529 money on higher education.

How did this change come about? On Dec. 23, Congress passed a $1.7 trillion federal omnibus spending package that contained several new rules, including an amendment to the Internal Revenue Code that allows for tax-and penalty-free rollovers from 529 plans to Roth IRA accounts. President Biden signed the spending package into law on Dec. 29 and it took effect on Jan. 1.

Are there any rules and restrictions? Yes, several. The transfer from 529 to Roth IRA must have occurred after Dec. 31, 2022. The 529 account must have been maintained for at least 15 years before the transfer, with the same owner and same beneficiary. The money being transferred to the 529 beneficiary’s Roth account must have been contributed at least five years before the transfer and there is a $35,000 limit on the total amount that can be transferred. Further, the amount transferred in any given year from a 529 plan to a Roth IRA is subject to the Roth IRA annual contribution limits. (That limit for 2024 is $6,500 for individuals, plus an extra $1,000 allowed for people over age 50. So it could take six years to reach the maximum transfer amount allowed.)