Chicago — A new bill could allow unused 529 college funds help families save for college or retirement.
Thanks to an amendment to the Internal Revenue Code, beneficiaries of 529 plans, which are state-sponsored qualified tuition programs that can be used for education expenses, can roll over funds from their accounts to Roth IRAs tax and penalty free, according to Yahoo Finance.
Though only 19% of parents take advantage of the plans, the change could boost participation in them now that the penalties can be avoided.
“529 plans fall short due to concerns that money left over could sit unused for years or suffer penalties if withdrawn for non-qualified expenses. There are currently minimal workarounds for money not used if your child doesn’t go to college or doesn’t need the full amount of the 529 accounts,” said Heidi King, an education and partnerships associate at College Inside Track.
The plans, which have no income, age or annual contribution limits, have two options: a prepaid plan or a savings plan. Colleges and states can offer prepaid plans, which locks tuition at current rates for a student who may not be attending college for years to come. Prepaid plans can only be used for tuition, not room and board.
There are some restrictions to the new rollover option individuals should keep in mind. Only the beneficiaries can take advantage of the rollover option rather than the account holder who set the plan up in the first place. The account must have been open for more than 15 years before funds can be rolled over and beneficiaries can only roll over a maximum of $35,000 during their lifetime.
Even with these restrictions, the option can help adult children meet some of their financial milestones.
“This is a very clever way for parents of current college students to get their children off to a great start to save for a first home — up to $10,000 in a Roth IRA — and/or retirement — think of the compounding of $35,000 over 50 years,” said Jim Mahaney, a certified financial planner and principal at Mavericus Retirement. “Well-to-do parents could pay college tuition out of pocket instead of drawing down their 529 plan, and thus leaving some of the 529 plan balance intact to roll over to a Roth IRA for the child.”