Provided by Mike Villeneuve, Wealth Manager at AEGIS Financial

529 accounts are not new, but they have undergone several meaningful changes in recent years which make them a great saving vehicle for every child. Many clients express concerns about saving in a 529 account if a child does not attend college. Recent changes expanding how 529 funds can be used and the new option to roll over unused funds to a Roth IRA should negate this concern.

What is a 529 account?

A 529 is “an investment account that offers tax-free withdrawals and other benefits when used to pay for qualified education expenses. You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments.” 1

 

What if a child does not go to college or does not use all the funds?

  • There are several options the 529 owner can choose if there are unused funds in a 529.
  • Withdraw the funds and pay taxes and penalties on the earnings.
  • Change the beneficiary on the account to someone who will use the funds.
  • Keep the unused funds in a 529 where they can remain invested and growing for future use.
  • New in 2024 – Rollover to a Roth IRA.

 

Qualifications For Rollover 2

  • To convert a 529 savings account into a Roth IRA, certain conditions must be met:
  • Contributions in the five years preceding rollover are ineligible.
  • The 529 beneficiary must also be the Roth IRA account owner.
  • The account owner must have earned income in the year of the rollover.
  • The account owner must be under the annual income limit for Roth IRA contributions.
  • The annual rollover limit is equal to the annual Roth IRA contribution limit.
  • Direct contributions and rollover contributions are cumulative towards the annual limit.
  • The account must have been open for at least 15 years before a Roth rollover request.
  • Total rollovers from 529 to Roth IRA are limited to $35,000 lifetime.

 

529 Tax Advantages

Federal

+ Earnings grow tax-free inside the account.

+ Withdrawals are tax-free as long as the money is used for Qualified education expenses.

– Contributions are not deductible.

State

+ Depending on what state you live in, contributions to 529s may be deductible or qualify for a state tax credit.

+ Withdrawals for qualified education expenses may be exempt from state taxes but can vary from Federal rules so it is important to understand what qualifies in your state before withdrawing funds.

– Rollovers to Roth IRA are not qualified in all states meaning it could be subject to state tax.

 

Qualified Education Expenses

College

  • Tuition and Fees
  • Books and Materials
  • Room & Board (for students enrolled at least half-time)
  • Computers and related equipment
  • Internet Access
  • Special needs equipment for students attending a college, university, or other eligible post-secondary educational institutions.

 

Other Qualified Expenses

  • Up to $10,000 per year, per beneficiary for k-12 tuition expenses
  • $10,000 in student loan repayments (lifetime)
  • Trade or vocational school or registered apprenticeship program expenses

 

Important Note: Not all states have adopted the expanded definition of qualified education expenses so withdrawals to pay for K-12 education, student loan payments, and trade/vocational schooling may be subject to state taxes on the earnings portion.

 

Resources:

1. https://www.savingforcollege.com/intro-to-529s/what-is-a-529-plan

2. https://www.forbes.com/sites/brianboswell/2024/03/04/how-to-roll-529-plan-assets-into-a-roth-ira-account/?sh=45daaa456b62