From College Fund to Retirement Nest Egg – Tax Free

rick kahlerWhen each of my children was born, I had their application for a 529 college fund filled out, mailed, and funded with the first $100 before they were released from the hospital. I dutifully funded those accounts monthly for years, until they accumulated enough to fund four years of college tuition at a South Dakota university.

What I didn’t count on were scholarships and different educational paths taken by my kids that left the 529 plans significantly overfunded. My options were to transfer the excess to a 529 plan for another family member or take the money out of the plan and pay income taxes and a 10% penalty on the growth.

Fortunately, a provision in the 2021 SECURE 2.0 Act that went into effect January 1, 2024, provides another option: to roll over unused 529 funds directly into a Roth IRA in the child’s name. This can give a young person who didn’t use all their 529 funds a head start on a tax-free retirement savings plan.

Before you get completely carried away with the possibilities, there are a few important restrictions to keep in mind:

  • The 529 plan must have been open for at least 15 years to be eligible.
  • You can’t roll over more each year than the annual Roth IRA contribution limit, which is currently $7,000.
  • The total lifetime amount you can roll over to a Roth IRA is $35,000. This is not indexed for inflation.
  • Contributions and their earnings in the last five years are not eligible for the rollover.
  • Once the funds are rolled into a Roth IRA, they can’t be rolled back into the 529.