Education Savings: Leftover 529 Plan Money Can Roll Over Into an IRA Thanks to New Law
Owners of 529 college savings plans got a potentially lucrative boost from the $1.7 trillion omnibus spending bill that passed in late December, thanks to a measure that allows unused money in the plans to be redirected to a tax-free Roth IRA account.
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Under the new legislation, investors can roll up to $35,000 from a 529 into a Roth IRA starting in 2024, Accounting Today reported. This is considered a major benefit to 529 accountholders because it means leftover money originally intended for a child’s education can now go toward retirement savings with no penalties or tax bills. An added bonus is that Roth IRAs offer tax-free growth and withdrawals, making them an especially popular choice for high-income investors.
“This is a huge deal,” John Bergquist, managing member of Lift Financial, told USA Today. “It opens the possibility on the backend to do something with the money. This will encourage people to invest in 529s or at least look at them more closely.”
Before the new law was passed, if you had leftover money in a 529 because a child didn’t go to college, the only way to get the funds was to pay the tax bill on them. That’s no longer the case now that up to $35,000 can go into a tax-free Roth.
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There are catches, however. The new law states a 529 account must be at least 15 years old before being rolled into a Roth IRA, Accounting Today noted. Also, contributions and growth from the past five years can’t be rolled over.
For those who can take advantage of the new law, the financial benefits are considerable. Derek Pszenny, financial advisor and co-founder of Carolina Wealth Management, provided the following analysis to USA Today:
Assume you’ve rolled over the lifetime maximum of $35,000 from the 529 into a Roth IRA by the time your child graduates from college at age 22. When your child reaches retirement age at 67, that amount will have grown to $1.6 million, based on 9% annual compound growth.
“That’s when I got really excited,” Pszenny told USA Today. “Then, you start to wonder how to squeeze out a couple hundred dollars in to save now.”
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