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Recent laws made it more attractive for parents and other custodians to save in a 529 plan. Before, unused funds would be taxed unless transferred to another beneficiary. The new legislation, however, now allows account owners to roll over the 529 plan to a Roth IRA.
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Opening and Maintaining Your 529 Plan
A 529 plan is a state-sponsored college savings plan. Anyone can open it for a beneficiary, and the custodian (the person who opened the account) maintains control until the money is withdrawn.
529 plans are meant to help college students pay for college. Funds are contributed after tax, but some states offer tax deductions for contributions. All contributions and earnings grow tax-free, and as long as you use the funds for 529 eligible expenses, the withdrawals are tax-free too.
What Are 529 Plan Rules Account Holders Should Know
The 529 rules are somewhat relaxed; however, the rules may vary by state. Each state offers different 529 plans. Sometimes it makes sense to open a plan in your state, but occasionally it may make sense to open one in another state if there are more benefits.
You can use 529 funds at any college in any state. However, you aren't required to have a 529 plan in the state your child or beneficiary attends college.
To be an account owner, you must be at least 18 years old, have a Social Security number, and live in the US. The beneficiary can be anyone, such as your child, grandchild, or any other relative. Also, anyone can contribute to the 529 plan to help a student with college expenses.
Individuals can contribute up to $85,000 per beneficiary per year as of the 2023 rules. This is up from $80,000 in 2022.
529 Qualified Expenses - What You Can Use 529 Funds For
529 funds can be used on any 529-qualified educational expenses, including the following:
- Tuition and fees
- Books and supplies
- Room and board
The eligible 529 expenses can be for college, a trade school, or K - 12 school.
Related Article | Should I Use A 529 Plan For Primary School Tuition?
Successfully Completing a 529 Rollover
If you don't need all the funds saved for college or educational expenses, new federal rules allow you to roll over your funds into a Roth IRA in your name.
Understanding What a 529 Rollover Is
When you roll over your 529 plan, you roll over some or all of the funds saved in your 529 into your beneficiary's retirement plan. You don't receive any funds in hand. Instead, you move the funds from one account to another.
Acceptable 529 Rollover Total
You can roll over up to $35,000 in a 529 plan throughout your lifetime.
When Can You Rollover a 529 Plan?
Americans can roll over unused 529 funds into a Roth IRA starting December 31, 2023.
Who Can Initiate a 529 Rollover?
The 529 rollover must be in the name of the beneficiary. So, for example, a parent who owns a 529 plan for their child cannot roll the funds into retirement accounts for themselves. Instead, they must roll the funds over to a retirement account for the beneficiary.
Are There Special 529 Rules for Rolling Over Funds?
Besides the maximum $35,000 you can roll over in a lifetime, there are more 529 account rules you must follow:
- The same IRA maximum annual limits apply. This means transferring the full $35,000 would take place over six years, as the IRA annual contribution limit is currently $6,500.
- The 529 plan must be open for at least 15 years before you can roll it over.
- Any funds you roll over must have been in the account for at least five years.
- Only one rollover per beneficiary is allowed in a 12-month period without tax implications. Additional rollovers in that period can be considered a non-qualified distribution and be subject to federal income taxes.
529 Transfers vs. A 529 Rollover
There is a large difference between a 529 transfer and a 529 rollover. Therefore, the 529 transfer rules differ from the rollover rules and should be clearly understood.
Understanding What a 529 Transfer Is
When you transfer a 529 plan, you change beneficiaries. So, for example, if you were saving for one child, but that child decided not to go to college, you might change to a new beneficiary to help another child with their college expenses.
Can You Transfer 529 to Another Child?
Transferring 529 plans is allowed at any time and for any of the current beneficiary's relatives. In our example above, we talked about a sibling, but you can also transfer the plan to cousins, step-siblings, or an aunt or uncle.
Transfer Limitations With 529 Plans
You can transfer a 529 plan to another beneficiary as often as you want per year. There is one exception to the rule. If you're rolling the funds over into another 529 plan for the same beneficiary, you can only do those transfers or rollovers once per year.
Transferring a 529 Plan Between States
There aren't any rules about transferring a 529 plan between states, except that you may only do it once per year for the same beneficiary. If you want to change it multiple times in a year, you must change beneficiaries to make the change.
Advantages of Transferring 529 Funds
- You don't have to worry about unused funds
- You can transfer to a different beneficiary as many times as you need
- There are no tax penalties for transferring 529 funds
Advantages of Rolling Over 529 Funds
- The ability to roll funds over makes it more reassuring to save money for college
- You can roll over up to $35,000 in your lifetime
- You can help your child plan for retirement early if they don't go to college
Related Article | What Is The Difference Between A 401K And An IRA?
When You Should Consider a 529 Plan Rollover
You can't use the 529 rollover plan until you've held the 529 plan for at least 15 years, and the funds must be in the account for at least five years. However, once you know your child isn't attending school or you have leftover funds, you can consider rolling some of the funds over while carefully following the rules.
No one can start the process until December 31, 2023.
How Much Can a 529 Hold in One Account?
Unlike retirement accounts, 529 plans don't have annual limitations. However, there is a lifetime cap, but it is quite high, ranging from $235,000 to $550,000, as it varies by state.
Will I Own Recaptured Tax on a 529 Plan in My State?
If you roll over funds into another 529 plan in another state, you may owe recapture taxes to the state that provided the initial tax deduction. However, the rules vary by state.
Can You Roll Over Existing 529 Plans Across Companies?
You can roll over existing 529 plans into another 529 plan once per year. There are no limitations regarding where you roll it over. Just be sure to deposit the funds in the new account within 60 days of withdrawal to avoid a 10% penalty.
Can I Change My Investments Around?
Federal law allows you to change investments for current funds two times a year. However, you can switch investments for future contributions as often as you want.
Are 529 Plans Flexible?
529 plans are somewhat flexible as parents can change the beneficiary if there are unused funds, roll the funds over to a Roth IRA, or keep the funds in the account for a future grandchild or a child's graduate school.
Is There a Difference Between a Prepaid 529 College Savings Plan and a Standard 529 College Savings Plan?
A prepaid 529 college savings plan allows parents to lock in today's tuition rates for a future college student. You must reside in the state where the plan is offered to take advantage of it. A standard 529 plan, on the other hand, can be used for any 529 plan-qualified expenses at any college.
Can My 529 Plan Be Used for Non-College-Related Things?
You may be able to use 529 funds for other qualified educational expenses, including expenses for a vocational school or grades K - 12. However, if you use the funds for anything besides qualified educational expenses, you may pay a 10% penalty plus applicable taxes.
How Many 529 Plans Can You Have?
There isn't a limit to the number of 529 plans a child can have.
What Happens to Unused 529 Funds?
If you overestimate the amount your child will need for college, you may have unused funds. You can use funds by transferring to another beneficiary, use the funds to help your child with student loan repayments, or take a non-qualified distribution and pay the penalty and taxes.
The Bottom Line: Can You Rollover a 529 Plan?
Starting next year, you can roll over a 529 plan to an IRA. There are strict rules, including that you must own the account for 15 years, and the funds must be in the account for at least five years before being rolled over. You also cannot roll over more than $35,000, and the account must be in the beneficiary's name.
Regardless of the rules, it's good news for parents and grandparents who aren't sure whether their child will attend college, ensuring the funds won't sit unused.