“Parents Have a New Incentive to Fund ‘529’ Plans”, published by The Wall Street Journal discusses changes in the rules governing 529 plans – education-savings accounts – and how these changes can benefit parents and students. (NOTE: The changes will go into effect in 2024 and will be part of the Secure 2.0 Act, a 2022 law that impacts various retirement plans; subsequent changes and amendments may occur). The changes address:

• Ability to rollover to Roth IRAs: excess funds in 529 plans can now be rolled over into Roth IRAs tax-free if the Roth IRA belongs to the beneficiary of the 529 plan. Previously, withdrawing leftover funds not used for qualified educational expenses would result in income tax on the earnings portion and a 10% penalty. This change can provide an opportunity for young people to start a Roth IRA and jump-start their retirement savings. However, there are several restrictions and considerations:

• The Roth IRA must be in the name of the beneficiary, not the owner of the 529 account.

• There is a lifetime maximum amount of $35,000 that can be transferred from the 529 to the Roth IRA.

• The 529 plan must have been open for more than 15 years.

• Rollover funds cannot include contributions to the 529 account and earnings on those contributions made in the previous five years.

• Rollovers are subject to the annual Roth IRA contribution limit, which may vary each year.

There are two unaddressed concerns that still remain which may require clarification from the Internal Revenue Service (IRS):

• Whether a new 15-year waiting period is established when a 529 account holder changes the beneficiary of the plan.

• Whether the $35,000 lifetime maximum is the total for all rollovers made from an owner’s 529 account or the amount allowable for each beneficiary. Experts generally believe that the $35,000 limit is per beneficiary and that amount can be rolled over to the Roth IRA of more than one person.

At Omnia Pathways, we believe that paying for college is one of the largest, most significant investments that a student and their families make in their lifetimes. We recognize this process is overwhelming and offer assistance in your search for scholarships, grants, and loan opportunities. Please see our Services for more information and schedule a Free Consultation, to help you accomplish your college admissions goals.

Citation: Sloane, Leonard. ““Parents Have a New Incentive to Fund ‘529’ Plans.” Wall Street Journal, 2 September 2023, Parents Have a New Incentive to Fund ‘529’ Plans - WSJ