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  • Chris Cyndecki CFA, CFP®

What to do with leftover 529 assets?

529 college savings plans have been useful vehicles for funding college expenses.

Money invested within a 529 account avoids taxes on investment growth (capital gains, interest, dividends), as long as the fund are used for qualified education expenses. This tax-advantaged structure allows funds to compound more quickly over time.

However, parents often wonder: What happens if my child decides not to go to college? Or what if they receive a scholarship?

Previously, parents had two main options:

  1. transfer 529 funds to another family member (i.e. change the beneficiary) to be used for qualified education expenses

  2. withdraw 529 funds to use for non education expenses: requires reporting the growth of the account as income plus a 10% penalty

New legislation (SECURE 2.0) now allows for an additional option: roll over the 529 funds into a Roth IRA for the beneficiary. There are several important rules to consider:

  • the Roth IRA must be in the name of the beneficiary (child)

  • lifetime rollover limit of $35,000 applies

  • the 529 plan must have been opened for at least 15 years

  • rollover amounts cannot include any 529 contributions made in the last 5 years

  • rollovers are subject to the annual Roth IRA contribution limits ($6500 per year in 2023); rollovers would likely need to be completed over several years

  • the beneficiary must receive compensation (earned income) to be eligible for an annual rollover amount

  • rollover amounts would reduce any normal Traditional IRA or Roth IRA contribution amounts; for example: beneficiary cannot contribute $6500 to their IRA and receive a 529 rollover amount in the same year (no doubling-up)

On the surface, the new 529 to Roth IRA rollover seems like an attractive option. However, parents should understand the numerous rules before changing their 529 contribution strategy.

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