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A New 529 Option

A New 529 Option

| January 15, 2024


529 accounts are a great way for parents/grandparents to help kids save for college and graduate school. But we’re often asked what happens if there are unused funds leftover in a 529 account? In the past, you had the following options:

  • Cash the account in and pay tax and a 10% penalty on the earnings. (Not ideal!)
  • Transfer the funds to another family member who can use those funds for college.
  • Leave the funds in the account for future children of the beneficiary.
  • Up to $10,000 of 529 funds can be used to pay off qualifying student loans.

 

There is now another option. Starting in 2024 you can rollover unused 529 assets - up to a lifetime limit of $35,000 - into the account beneficiary's Roth IRA avoiding any taxable income. To do this, the following conditions must be met:

  • Holding periods - You need to have owned the 529 for at least 15 years before you can execute a rollover. Contributions to the 529 plan must have been made more than five years before distributions start. Any contributions and gains made in the last five years are ineligible.
  • Limits - The rollover amount can't exceed the annual Roth contribution limit and is limited to the amount of earned income of the beneficiary each year. The 2024 limit is $7,000, and there is a $35,000 rollover lifetime limit.
  • Ownership - The beneficiary of the 529 plan must also be the owner of the Roth IRA.

 

Overall, this new provision gives 529 account owners another avenue (a way out) for excess savings after college. If you have leftover funds in a 529 College Savings plan and want to discuss the best option for you, please contact your Odyssey advisor.