Year-end Planning: Unused/Leftover funds in a 529 Plan

Year-end Planning: Unused/Leftover funds in a 529 Plan

Posted

by Vida Jatulis

on Nov 12, 2024

Many families that I work with often worry about having unused or leftover funds in a 529 plan if things do not go according to plan.  Now there are more options!  A new rule for 2024…allows you to rollover unused or leftover 529 plan money to a Roth IRA owned by the 529 plan beneficiary.  But keep reading because there are eligibility criteria and not all states recognize this new rule.

To avoid potential taxes and penalties with a 529 plan rollover to a Roth IRA make sure to understand the requirements.

• Account age: The 529 plan must have been open for at least 15 years.
• Rollover amount: The rollover amount must be from contributions made to the 529 account at least five years prior to the transfer date.
• Annual contribution limit: The rollover amount cannot exceed the annual Roth IRA contribution limit for the year. For 2024, the annual Roth IRA contribution limit is $7,000, or $8,000 for individuals aged 50 and older (based on age of the beneficiary).
• Lifetime rollover limit: The total amount that can be rolled over from a 529 plan to a Roth IRA over a beneficiary’s lifetime is $35,000.
• Direct transfer: The rollover must be a direct trustee-to-trustee transfer.
• Beneficiary name: The Roth IRA must be established in the name of the 529 account’s designated beneficiary.
• Earned income:  The beneficiary needs to have earned income equal to at least the rollover amount.
• Not all states recognize this new rule so you may owe state taxes and penalties.  Read more

As you wrap up the year, perhaps you want to explore taking advantage of this new rule.  You have until the tax filing deadline April 15, 2025, to complete the 529-to-Roth IRA rollover for the 2024 tax year.

Also, remember to consider your other options for unused/leftover 529 plan funds:

• Change the beneficiary of the 529 plan to another qualifying family member and use it for qualified education expenses.
• Create an education legacy for grandchildren.
• Save it for graduate school, professional programs, pursuit of a different field of study, resuming college later.
• If the beneficiary has special needs, you can rollover the 529 plan into an ABLE account which has a much broader definition of qualified expenses.
• Use up to the $10,000 lifetime limit to pay student loans.
• If the 529 plan beneficiary gets a scholarship, you can withdraw up to the scholarship amount penalty-free.

529 plans are a great education savings vehicle.  Your contributions can grow tax-free and if you use the money for qualified education expenses there are no taxes on distributions. College is a big expense, and the best strategy is to have savings to meet your family’s goal of paying for college.  So have no fear…save to a 529 plan and if things do not work out as planned…you have options for your unused