Diving into the World of 529 Savings Plans: A New Spin on Retirement Savings
Investing in a 529 plan for your child's education could potentially support their retirement savings in the future.
Yo, listen up! A 529 savings plan is no longer just about funding college expenses. Thanks to recent changes, it can also help your cherub kickstart their retirement. If you've been hesitant to open one due to college uncertainties or fear of excess funds, brace yourself! Thanks to the SECURE Act 2.0, leftover 529 funds can now be rolled over into a Roth IRA.
Rob Williams, the financial planning and wealth management guru at Charles Schwab, filled us in on the deets. "This new provision was a part of the SECURE Act 2.0, which was passé in 2022," he said. "It allows for more flexibility in how 529 assets are used if you have money left over after a child goes to college—you can roll over a certain amount from that 529 into that beneficiary's Roth account."
So why are these Roth IRAs all the rage? Simply put, they offer special tax benefits. You pay taxes on your contributions upfront, your investments grow tax-free, and you don't pay a dime when you take withdrawals in retirement.
But before you start rolling those 529 dollars, keep in mind there are a few rules to follow. For example, the 529 plan must be open for more than 15 years, and you can't convert any 529 savings contributions from the last five years. Additionally, there are limits on how much you can roll over in a lifetime, and contribution limits based on the annual Roth contribution limit. You must also have earned income that is at least equal to the amount you roll over in a year, and the 529 plan can only be converted to a Roth account for the same beneficiary.
Intrigued? Get ready to explore the ins and outs of 529 savings plans, what they are, how they work, and even some related stuff to help you make informed decisions when it comes to your family's financial future.
What Is a 529 Savings Plan?
529 savings plans are a type of tax-advantaged account that's all about educational expenses. Operated by states, these plans offer a sweet deal when funds are used for qualified education expenses like college tuition, books, room and board, and more. Free from federal and state taxes!
You can open a 529 savings plan for yourself or designate someone else as the beneficiary, like your child, grandchild, or niece. When you open a plan, you'll be given different investment options, like portfolios based on the age of the beneficiary and your risk tolerance. These portfolios may shift the investment allocation into more conservative assets as the beneficiary approaches college age, similar to target-date funds.
Funds in a 529 grow tax-deferred, and many states offer deductions or credits for contributions. In 2025, you can contribute up to $19,000 per year without triggering the federal gift tax. And even if the beneficiary doesn't use up all the funds in a 529 savings plan, you can still withdraw the original contributions tax-free. However, if you withdraw earnings, those are typically subject to federal and state taxes as well as a 10% penalty.
The Adventure of Converting a 529 Savings Plan to a Roth IRA
While having the ability to convert a 529 savings plan to a Roth IRA offers some enticing options, it's important to remember that rushing to open a 529 soleSMALLLY with the goal of converting it to a Roth IRA might not be the brightest idea. This is because there are many rules and requirements that apply to these rollovers.
When it comes to rolling over funds from a 529 savings plan to a Roth IRA, there are a few key conditions to keep in mind:
- The 529 savings plan must be open for more than 15 years.
- You can't convert any 529 savings contributions from the last five years.
- You can't rollover more than $35,000 in a lifetime per beneficiary.
- The amount you roll over in a year cannot exceed the annual Roth contribution limit.
- You must have earned income that is at least equal to the amount you roll over in a year.
- The 529 savings plan can only be converted to a Roth account for the same beneficiary.
If you're wondering whether you can change the beneficiary on a 529 savings plan and still do a rollover, the answer is a little fuzzy. The IRS hasn't provided explicit clarification on this, but it's safe to say that some changes might affect your ability to do a rollover.
The Final Say
A 529 savings plan remains a powerful tool in helping save for a child's education, thanks to its tax-deferred growth and tax-free withdrawals for qualified expenses. Now, thanks to the SECURE Act 2.0, unused funds can play a crucial role in jumpstarting your child's retirement by rolling over into a Roth IRA. Just remember that there are strict rules to follow when converting 529 funds to a Roth, and it's essential to consider these rules before making any decisions.
If you're looking to help your kids get a leg up on retirement savings, Williams suggests a different strategy—opening a Roth IRA for them while they're young. Kids will need some earned income to get started, but it's a smart move that can help set them up for a financially secure future. Happy saving!
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- "As an additional option for investing in personal-finance, consider the opportunity to rollover leftover 529 funds into a Roth IRA, providing special tax benefits similar to those in an ICO (Initial Crypto Offering)."
- "While investing in a 529 Savings Plan is primarily associated with finance and education, recent regulation changes like the SECURE Act 2.0 have opened opportunities for investment in personal-finance, such as financing one's own retirement."
