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