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529 Plans Expanded to Allow Rollovers for Retirement Savings: What You Need to Know
The recent changes brought about by federal legislation passed in 2022 are now in effect for individuals with 529 education savings accounts. In addition to saving for school expenses, account owners can now also jumpstart their retirement savings.
Starting from January 1, account owners have the ability to roll over unused funds to Roth IRA accounts. This change is particularly important for those who were concerned about over-saving for educational purposes, according to Greg Dyer, Chief Compliance Officer at My529, a state agency that manages and provides education on the savings plan.
“Congress’ intention was to support the initiation of retirement savings for a beneficiary who has completed college and no longer needs the funds for educational expenses,” he said.
Within the first 10 days of the change, more than 90 rollovers were conducted in Utah, which is home to the fourth largest 529 plan in the country with over $21 billion in assets under management. Dyer attributes this success to the state’s low investment fees and overall positive reputation.
529 plans, named after section 529 of the Internal Revenue Code, allow individuals from all states, except for Wyoming, to save for tuition and other educational expenses in their state’s plan, including books, fees, room and board, and K-12 and graduate school expenses.
While there are different types of plans available, one of the most popular options operates similarly to a Roth IRA, providing individuals with a tax-advantaged savings plan for education expenses.
“Contributions to 529 plans do not receive a federal tax deduction initially, but the funds can grow and compound tax-deferred. If used for qualified education expenses, the taxes are waived,” explained Dyer.
However, there are certain requirements that must be met in order to transfer the funds. Accounts need to be at least 15 years old, and account owners cannot roll over any funds or earnings that have accrued in the past five years.
“While the funds can grow, you cannot contribute in one year and then roll over the following year. There is a five-year waiting period,” Dyer clarified.
The annual amount that users can roll over is limited to the Roth IRA contribution cap, which is typically approximately $7,000 for all savings sources.
“For example, if you contributed $5,000 to your regular Roth IRA, you can only roll over $2,000 from your 529 plan,” Dyer stated.
Furthermore, there is a lifetime limit of $35,000 for rollover contributions.