is a powerful tool to help pay for rising education costs. However, some people are hesitant to use them.
One common concern is: 529 funds are the only funds you can cover without incurring a tax penalty, but determining exactly how much money you actually need can be difficult.
Many parents open a 529 when their child is born, when they have no way of knowing if their child will earn a scholarship or even go to college. Fortunately, parents with multiple children can change the beneficiary of their 529 plan.
But what if you still have money left over after paying your education fees?
Thanks to , you can: However, a 529 rollover is not a loophole for saving extra money for retirement. Rules restrict conversion.
Here are some things to consider:
What are the rules for converting a 529 plan to a Roth IRA?
The Roth IRA receiving funds must be in the name of the 529 plan beneficiary.
529 plans must be open for at least 15 years.
529 donations (or proceeds from such donations) made within the past five years cannot be redeemed for cash.
Rollover 529 funds count toward your IRA’s annual contribution limit.
You can move up to $35,000 from a 529 plan into a Roth IRA over your lifetime.
529 funds must be converted by paying the amount directly into a Roth IRA. You can’t pay it yourself and then put the money into a Roth IRA later.
You can only contribute to a Roth IRA if you have income from your job. Therefore, if a 529 to IRA conversion occurs, the 529 beneficiary must have qualifying income.
Roth IRA income limits do not apply to 529 rollovers.
While avoiding the income limit is a retirement savings perk for high-income earners, the remaining rules for rolling over excess 529 funds are designed to help people use their 529 plans for education as intended. Annual contribution limits and lifetime conversion limits prevent you from doubling your retirement funds.
So what does it all boil down to?
The ability to convert unused 529 funds to a Roth IRA alleviates potential concerns about oversaving for education. But don’t rely on $529 as a retirement savings vehicle. Instead, consider funding a Roth IRA separately.
Rollover to 529 ABLE accounts
Families with children with disabilities can rollover their 529 accounts to ABLE accounts. This is a tax-advantaged way to save for the needs of a person with a disability while remaining eligible for government assistance. It uses the same legal framework as a 529 plan and functions similarly. Contributions are made in after-tax dollars to a plan that includes a set menu of investment options. Earnings compound tax-free, and withdrawals to pay qualified expenses are also tax-free.
You can transfer funds from your 529 plan to your ABLE account up to the ABLE annual contribution limit of $19,000 without incurring tax penalties. ABLE accounts must have the same designated beneficiary as a 529.
Eligibility for an ABLE account is limited to individuals with severe disabilities that began before age 46. ABLE accounts include a broader range of eligible expenses, including education, housing, health care, employment training and support, and legal fees.
Individual needs and circumstances change throughout the lifespan, often in ways we cannot predict. ABLE account rollovers provide additional flexibility for families if the beneficiary of the 529 account is diagnosed with a disability or becomes disabled due to an accident or injury.
This article was brought to you by tAssociated Press (Morningstar).
