By Nino Pavan, J.D., CFP®
If you have been saving for your kids’ college, you are probably familiar with the 529 College Savings Plan. This state-sponsored education savings account has many great features, including allowing earnings to grow tax-free, state tax deductions, and no annual contribution limits. There are maximum aggregate limits, however, that vary by state, anywhere from $235,000 to $550,000 per child. While there is a lot of flexibility in how to use these funds, one of the drawbacks occurs when there is leftover money in the account. The good news? That’s changing in 2024. Here’s what you need to know about converting your 529 College Savings Plan to a Roth IRA—and how it can help you move closer to your overall financial goals.
How It Works
As of Jan. 1, 2024, a change in the rules for 529 education savings plans allows excess money not used for a beneficiary’s education to be rolled over to a Roth individual retirement account (IRA). The new law allows up to $35,000 over a lifetime to be rolled over from a 529 plan to a Roth IRA—and that process is tax-free and penalty-free. Both savings vehicles are funded by after-tax dollars.
The Fine Print
As always, you have to read the fine print to understand the complete picture. While this may be a welcome change for many parents, some limitations are important to be aware of. Here are the rules for converting the money in a 529 plan to a Roth IRA:
- You must have had your 529 account for at least 15 years.
- Your yearly conversion is capped at the annual IRA contribution limit.
- Money eligible to be rolled over must have been in your 529 plan for at least five years.
- The owner of the Roth IRA must be the same as the beneficiary of the 529 plan.
Alternate Ways to Use the Money
So, why is this change good news? Let’s say your child chooses not to go to a four-year college or any college at all. Or maybe they receive a full ride via a scholarship or other means. Before this year, your only other option to utilize those funds without penalty was to transfer the funds to another beneficiary or possibly use them for pre-college educational expenses up to $10,000 annually. Thanks to the SECURE Act of 2019, you can also use your 529 savings to pay for apprenticeship fees or up to $10,000 of qualified student loan repayments (including those for the 529 plan recipient’s siblings).
But if you don’t start saving for college with a 529 plan when your kids are young, those options may not help. With the new 529 plan rules, you have another alternative to letting your savings go unused or getting penalized for withdrawals.
Financial Aid Is Still Possible
Another change this year impacts your child’s financial aid eligibility. Typically, a parent-owned 529 account does factor into the Free Application for Federal Student Aid (FAFSA) calculation while an account owned by another relative (such as a grandparent) is not reported. The distributions from a grandparent-owned account, however, were considered untaxed income for the student and would, therefore, affect their eligibility for need-based financial aid. Starting with the 2024-2025 school year, however, these distributions will no longer be reported, which means a student may be eligible for more financial aid.
Ready to Start Saving?
The bottom line is that the 529 College Savings Plan is a great way to start saving for your child’s college or other educational expenses. But if you have avoided using this savings vehicle due to the limitations, the recent changes are good news. So, how does saving for college fit into your overall financial plan? That’s where the advice of a trusted financial professional can help.
At Financial Designs, we help Southern California Edison employees and retirees financially prepare for and confidently enjoy their retirement years through goal-centered planning. Whether preparing for retirement, planning for your family’s education, or adapting to major life changes, we serve as a trusted partner to help you chart a path forward. We would love to answer your questions, explain your options, and help you progress toward your goals for college savings and more. To schedule a no-obligation consultation, call (909) 626 1642 or email fdc@fdcadvisors.com today!
About Nino
Nino Pavan is President and a CERTIFIED FINANCIAL PLANNER™ professional at Financial Designs, a retirement planning firm in Claremont, California, with the mission of enabling individuals and families to financially prepare for and confidently enjoy their retirement years through goal-centered planning. With more than 30 years in the financial services industry, Nino is thankful for the opportunity to serve his clients by making the retirement process a stress-free one; he worries about their money so they don’t have to!
Nino holds a law degree from the University of Southern California, a Bachelor of Science in Telecommunications Management from DeVry Institute of Technology and has been a contributing advisor to Kiplinger. In addition to being a CERTIFIED FINANCIAL PLANNER™ professional and Investment Advisor Representative, Nino has passed the Series 7, 24, and 63 securities exams and holds life and disability insurance licenses. He also conducts retirement and estate planning workshops for employees of major California companies. Outside of the office, Nino enjoys sports (regular and fantasy), traveling (specifically tropical destinations), walking, pickleball, church activities, and spending time with his wife Sherry and their two children, Derek and Sara. To learn more about Nino, connect with him on LinkedIn.
