Families can make a tax-free carryover from 529 plans into individual Roth retirement accounts starting in 2024.

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Americans who save for college in a 529 plan will soon have a way to save unused money while keeping their tax benefits intact.

The $1.7 trillion government financing package contains a provision that allows savers to transfer money from 529 plans to individual Roth retirement accounts exempt from income tax or tax penalties.

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The House of Representatives passed the measure on Friday and the Senate did so on Thursday. The bill is heading to President Biden, who is expected to sign it into law.

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The extension measure — which takes effect in 2024 — has some limitations. Among the biggest: There’s a $35,000 cap on transfers.

“It’s good judgment for people who have it [529 accounts] “And the money was not used,” said Ed Sloat, a certified public accountant and IRA expert based in Rockville Center, New York.

This might happen if the beneficiary — such as a child or grandchild — does not attend a college, university, vocational school, K-12 private school, or other qualifying institution, for example. Or, a student may receive scholarships which means there are 529 funds remaining.

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However, this investment growth is generally subject to income tax and a 10% tax penalty if it is used for non-qualifying expenses.

This is where moving to a Roth IRA can benefit savers with 529 funds stuck. The conversion will avoid income tax and penalties; Investments will remain tax-free in a Roth account, and future retirement withdrawals will also be tax-free.

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Moreover, the typical owner had an annual income of approximately $142,000 versus $45,000 for the other families, the GAO report said. Almost half of them, or 47%, have an income of more than $150,000.

The new conversion clause from a 529 to a Roth IRA has no income limits.

Limitations on converting a 529 into an IRA

While the new tax credit primarily benefits wealthier families, there are “very significant” restrictions on carryovers that reduce the financial benefit, Jeffrey Levine, a certified financial planner and certified public accountant in St. Louis, said in a statement. tweet.

The restrictions include:

  • $35,000 lifetime limit on transfers.
  • Migrations are subject to the annual Roth IRA contribution limit. (The maximum is $6,500 in 2023.)
  • The rollover can only be done for a Roth IRA beneficiary — not the account holder. (In other words, a 529 owned by a parent with the child as the beneficiary must be entered in the child’s IRA, not the parent.)
  • Account 529 must have been open for at least 15 years. (It looks like changing account beneficiaries could restart the 15-year clock, Levine said.)
  • Account holders may not carry forward contributions, or earnings from those contributions, made in the past five years.

In a briefing document, the Senate Finance Committee said the current 529 tax rules “have resulted in reluctance, delay, or withholding of funding 529s to the levels necessary to pay for increased education costs.”

“Families who sacrificed and saved in 529 accounts should not be punished with taxes and penalties after years if the beneficiary finds an alternative way to pay for their education,” the statement reads.

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Owners can also keep money in an account for the beneficiary’s graduate education or the education of a future grandchild, according to Savingforcollege.com. The money can also be used to make up to $10,000 in student loan payments.

The tax penalty may not be as bad as some think, according to education expert Mark Kantrowitz. For example, taxes are assessed according to the beneficiary’s income tax rate, which is generally at least 10 percentage points lower than the parent’s tax rate.

In this case, he said, the parent is “no worse than it would have been if he had saved in a taxable account,” depending on the long-term capital gains tax rates.


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