Hey, did you catch wind of this little-known fact? Now you can roll over any leftover 529 plan funds into Roth IRAs – and it’s pretty darn exciting!
This nifty rule came into play starting January 1st, 2024. Let’s break it down with a bit of strategy – are you playing defense or offense?
On the defensive side, you might’ve considered the classic 529 objections – “My kids will get a scholarship” or “They’re heading to a budget-friendly in-state school.” The worry of putting too much into the 529 plan is real for many families.
Guess what? We’ve got a solution now. If the 529 funds aren’t needed for education, you can roll them into a Roth IRA. There are some nuances, though. Are you rolling it back into the parent’s or grandparent’s name or the child’s?
It’s for the child beneficiary, with a maximum of $35,000. Oh, and here’s a kicker – the 529 account must have been open for at least 15 years before the Roth conversion.
Congress had this scenario in mind: you eagerly opened the account when your little one was born, but they ended up with a scholarship or going to a cheaper school. What do we do with these unused funds that would otherwise be taxable plus a 10% penalty if not used for education?
Well, after 15 years, you can transfer up to $35,000 to their Roth IRA.
But there’s a catch – you can’t do the ROTH conversion in one go. It needs to align with the annual IRA contribution limit. If your child’s limit is $7,000 per year, you’re spreading it over five years. Also, your child needs earned income to qualify for the transfer because any IRA contribution is tied to earned income in a calendar year.
Sure, Congress attached some strings, but it wipes away the objection of overfunding a 529 plan. $35,000 might not sound like a fortune, but it’s a solid kickstart for a tax-free retirement for your offspring.
Now, the offensive move – consider opening a 529 account with as little as $10. With a 15-year timeline, you’ve got room to strategize. Calculate how much you need to contribute each year to hit that $35,000 mark. After the 15th year, you can gradually transfer funds to your child’s Roth IRA should you not need the funds for educational purposes.
Yep, $35,000 is the cap, but it’s a pretty slick wealth transfer technique. If you have multiple kids or grandkids, you could potentially move $105,000 into their Roth accounts.
I know this BLOG POST doesn’t apply to most folks, but if only one parent or grandparent applies this new law to their loved ones, it will be worth my effort in writing it.
all the best… Mark