Unused 529 Funds? Utilize Them to Help Boost Retirement

As graduation season approaches, many parents of college-aged students are filled with pride and relief, seeing the culmination of years of planning and investment in their children’s education. The gift of education is invaluable, yet sometimes, diligent saving leads to surplus funds in 529 plans. Previously, utilizing these leftover funds without incurring penalties was a challenge. However, with the introduction of the SECURE 2.0 Act, new opportunities have emerged to repurpose these excess savings effectively.

Starting in 2024, the SECURE 2.0 Act introduces a valuable opportunity for families with unused 529 college savings plan funds: the ability to roll over up to $35,000 into a Roth IRA for the same beneficiary. This provision offers a tax-efficient way to repurpose leftover education savings into retirement funds.

Understanding the 529 to Roth IRA Rollover

A 529 plan is a tax-advantaged account designed to save for educational expenses. However, circumstances such as scholarships, attending a less expensive school, or choosing a different educational path can result in unused funds. Previously, withdrawing these funds for non-educational purposes could incur taxes and penalties. The new rollover option provides an alternative by allowing the transfer of excess 529 funds into a Roth IRA, subject to specific conditions.

Eligibility Criteria and Limitations

To qualify for a 529-to-Roth IRA rollover:

Account Age: The 529 account must have been open for at least 15 years.
Contribution Age: Funds being rolled over must have been in the account for at least five years.
Beneficiary Consistency: The Roth IRA must be in the same name as the 529 plan beneficiary.
Annual Limits: Rollovers are subject to annual Roth IRA contribution limits ($7,000 for individuals under 50 in 2024).
Lifetime Cap: There’s a lifetime rollover limit of $35,000 per beneficiary.
Earned Income Requirement: The beneficiary must have earned income at least equal to the amount being rolled over in the year of the transfer.

Practical Example

Consider Sarah, whose parents established a 529 plan for her education. After graduation, she has $25,000 remaining in her 529 account. With the new provision, Sarah can roll over these funds into her Roth IRA, adhering to the annual contribution limits.

Assuming she has sufficient earned income, she could transfer $7,000 in 2024 and continue rolling over funds in subsequent years until the $25,000 is fully transferred. This strategy allows Sarah to enhance her retirement savings without incurring taxes or penalties on the unused 529 funds. Therefore, after 40 years, Sarah’s $25,000 investment could potentially grow to approximately $257,142.95 assuming a consistent 6% annual return.

See the Math: Compound Interest Calculator

https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

Benefits and Considerations

This rollover option provides flexibility in managing unused 529 funds, transforming potential penalties into retirement savings opportunities. However, it’s essential to plan accordingly, considering the annual contribution limits and ensuring compliance with all eligibility requirements. Consulting with a financial advisor can help navigate this process effectively.

Sources and References

Fidelity.com –https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth#:~:text=Starting%20this%20year%2C%20under%20certain%20circumstances%2C%20529,to%20a%20Roth%20IRA%20for%20a%20beneficiary.&text=Additionally%2C%20the%20transfer%20amount%20must%20come%20from,IRAs%20must%20not%20exceed%20$35%2C000%20per%20beneficiary

Abbey Street, LLC (“Abbey Street”) is a Registered Investment Advisor (“RIA”) registered with the SEC. Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Abbey Street renders individualized responses to persons in a particular state only after complying with the state’s regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. The information contained in this article is intended to provide general information about Abbey Street and its services. It is not intended to offer investment advice. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement and shall be subject to the terms and conditions therein. Information regarding investment products and services are provided solely to read about our investment philosophy and our strategies and to be able to contact us for further information. You should not rely on any information provided on our web site in making investment decisions. Market data, articles and other content discussed in this video or article are based on generally-available information and are believed to be reliable. Abbey Street does not guarantee the accuracy of the information contained in this video or article. The information is of a general nature and should not be construed as investment advice and relied upon in making investment decisions. Abbey Street will provide all prospective clients with a copy of our current Form ADV, Part 2A (Disclosure Brochure) prior to commencing an advisory relationship. However, at any time, you can view our current Form ADV, Part 2A at adviserinfo.sec.gov. In addition, you can contact us to request a hardcopy.

Unused 529 Funds? Utilize Them to Help Boost Retirement

Understanding the 529 to Roth IRA Rollover

Eligibility Criteria and Limitations

Practical Example

Benefits and Considerations

Sources and References

About The Author

Ben Clymer

Get in touch with Abbey Street