This article was published at Forbes.com in February 2024 and can be read in its entirety below. Click here for a link to the original article. Black Walnut Wealth Management contributes articles and is featured in various media outlets.
For families saving money for college, 529 savings plans are important tools. If you’re a grandparent, you’re likely eager to contribute to a 529 for your grandchild, but what happens to the remaining funds after your grandchild completes their education?
Even with the elevated costs of higher education today, having money left in a 529 plan is a real possibility. Your grandchild may decide not to attend college or could receive scholarships and financial aid that cover most of their expenses.
Thanks to a provision that went into effect this year, grandparents have more flexibility regarding leftover 529 funds, so here’s what you need to know.
New 529 Rules In 2024
As you’re likely aware, 529 plans have specific withdrawal restrictions to avoid taxes and penalties. Generally, 529 funds must be used for qualified education expenses, such as college or trade school tuition. The remaining 529 funds can typically be transferred to another person or used for additional educational expenses, such as graduate school or professional training.
Thanks to the SECURE 2.0 Act, passed by Congress in 2022, grandparents have another option when it comes to leftover 529 funds. Starting this year, you may roll over unused 529 money into a Roth IRA for your grandchild. This is a great way to help your loved one get a head start on saving for retirement, but there are several important rules and limits to consider.
As of 2024, grandparents may roll 529 funds into a Roth IRA for a grandchild without taxes or penalties under the following limitations:
- To take advantage of the 529 to Roth IRA rollover, you need to have owned the 529 for 15 years or more. Additionally, any contributions made to the 529 plan within the previous five years (and the associated earnings) are not eligible for a Roth IRA rollover.
- The 529 to Roth IRA rollover is subject to the annual Roth contribution limit, which is $7,000 as of 2024, and a lifetime limit of $35,000. This means if you want to roll over the entire $35,000, you’ll need to do so over several years.
- The 529 beneficiary must also be the Roth IRA owner.
- To complete a 529 to Roth IRA rollover, the beneficiary must have earned income. The amount of the rollover is the lesser of the beneficiary’s earned income or the annual contribution limit. For example, if the beneficiary earned $3,000 one year, only $3,000 of the 529 funds can be rolled into a Roth IRA. If the beneficiary is unemployed, a rollover isn’t permitted since there is no earned income.
Other Ways To Use Leftover 529 Funds
Though 529 to Roth IRA rollovers are a good idea for some people, it may not make sense in every situation. Here are other options to consider for those leftover funds.
- Additional education or training: Your grandchild can use 529 funds to further their education. Examples include post-graduate courses or professional training to gain skills and boost competitiveness in the job market.
- Unexpected undergraduate costs: Your grandchild may end up needing what would otherwise be excess funds due to a delay in college entry or simply changing majors.
- Student loans: Your grandchild can use 529 funds to pay up to $10,000 in student loans.
- Another beneficiary: Once your original beneficiary graduates, you may transfer unused funds to someone else, such as a sibling or another family member.
- Your continuing education: Perhaps you have an interest you’d like to pursue yourself and decide to transfer funds to an account for your own continuing education.
- Withdrawal for other expenses: It is also permissible to use leftover 529 funds for a home renovation or other large purchase, although this is considered a nonqualified withdrawal and will be taxed accordingly. You’ll generally need to pay federal income taxes and a 10% penalty on the earnings.
Conclusion
Thanks to this law change, grandparents have considerably more flexibility when it comes to leftover 529 funds. The 529 to Roth IRA rollover is a tax- and penalty-free way to help kick-start your grandchild’s retirement savings, but the rules and limitations are complex. Consult with your financial planner to help determine your best option and guide you through the rollover process.
