New federal law allows rollover of unused 529 funds into retirement account (2024)

FAQs

New federal law allows rollover of unused 529 funds into retirement account? ›

One feature of the 2022 legislation that received a significant amount of attention was a provision allowing for tax-free rollovers from Section 529 accounts to Roth IRAs. Starting in 2024, beneficiaries of 529 college savings accounts are permitted to do a tax-free rollover to a Roth IRA.

“Starting in 2024, the SECURE 2.0 Act allows savers to roll unused 529 funds into the beneficiary's Roth IRA without a tax penalty,” says Lawrence Sprung, author of Financial Planning Made Personal and founder of Mitlin Financial in Hauppauge, New York.

With the new regulations, 529 plan account owners or beneficiaries can roll over 529 funds into a beneficiary-owned Roth IRA tax-free and penalty-free as of January 1, 2024, subject to the limitations described below. If you qualify, this can be a great way to help kick start a beneficiary's retirement savings.

If you or a family member has an open student loan balance, you can use up to $10,000 of the leftover 529 funds to pay those loans down. Signed into law in 2022, the SECURE 2.0 Act allows funds to be used to pay off both federal and private student loans.

It works like this: Starting in 2024, you can roll unused 529 assets—up to a lifetime limit of $35,000—into the account beneficiary's Roth IRA, without incurring the usual 10% penalty for nonqualified withdrawals or generating any taxable income.

Families Can Roll Unused Funds from Their 529 Account into a Roth Individual Retirement Account (IRA) Starting in 2024, when 529 account owners find themselves with leftover funds, they have another option for that money.

One feature of the 2022 legislation that received a significant amount of attention was a provision allowing for tax-free rollovers from Section 529 accounts to Roth IRAs. Starting in 2024, beneficiaries of 529 college savings accounts are permitted to do a tax-free rollover to a Roth IRA.

But have you ever wondered what happens to unused 529 funds? You have two options: Withdraw the money or save the unused 529 plan funds for future qualified education expenses. Don't worry; leftover 529 money is common, and you can still make the most of the funds after graduation.

The 5-year election must be reported on Form 709 for each of the five years. For example, a $50,000 529 plan deposit in 2024 can be applied as $10,000 per year, leaving $8,000 in unused annual exclusion per year. This is often called 5-year gift tax averaging or superfunding.

Leave the account intact.

If your child is simply not sure about college or perhaps wants to delay applying, you can keep your 529 plan intact until the child does use it for qualified education expenses.

What is the 529 loophole? ›

On the 2024-25 FAFSA, students are no longer required to report cash gifts from a grandparent or contributions from a grandparent-owned 529 savings plan. Because of this, grandparents can now use a 529 plan to fund a grandchild's education without impacting their financial aid eligibility.

The Secure 2.0 Act, which passed into law late last year, created this new provision that allows the owner of a 529 account to transfer up to $35,000 in unused education funds to a Roth IRA for the account's beneficiary, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Beneficiaries of a 529 plan will be able to convert a lifetime total of $35,000 from a 529 plan to a Roth IRA without incurring taxes or penalties. To do so, participants will have to follow a few key rules, including: Conversions in a given year are limited to that year's IRA contribution limit.

How will SECURE Act 2.0 affect 529 plans? SECURE 2.0 allows funds from an established 529 account to be transferred tax-free to a Roth IRA for the beneficiary of the 529 account. Now, unused educational funds have the potential to kickstart a beneficiary's Roth IRA savings. This change, however, comes with limitations.

529 college savings plans do not have contribution deadlines. You may contribute to a 529 plan at any time throughout the year, and you do not have to stop making contributions once the beneficiary reaches a certain age.

529 Plans and the Annual Gift Tax Exclusion

Individuals can put up to $90,000 into a 529 plan over five years while still having that money excluded from the gift tax. Married couples filing jointly can do the same for up to $180,000. However, they'd need to put a hold on making further contributions for five years.

How are 529s changing? Previously, any withdrawals not used for educational expenses were subject to federal income tax plus an additional 10% penalty on earnings. As of Jan. 1, 2024, however, unused funds from a 529 plan can be rolled over into a Roth IRA account tax-free.