“Turn Unused 529 College Funds into Tax-Free Retirement Savings with New SECURE 2.0 Act Provision”

Title: New SECURE 2.0 Act Allows Rollover of Excess 529 Funds into Roth IRA for Young Adults

As a parent, planning for your child’s future education is a top priority. Setting up a 529 college fund and diligently contributing to it over the years is a common practice for many families. However, what happens when your child doesn’t use all the funds in their 529 plan? Thanks to a provision in the 2021 SECURE 2.0 Act that took effect on January 1, 2024, there is now a new option available: rolling over unused 529 funds directly into a Roth IRA in the child’s name.

This new opportunity provides young adults with a head start on building a tax-free retirement savings plan. By repurposing excess 529 funds into a Roth IRA, individuals can benefit from tax-free growth and a wider range of investment options. This not only offers financial security in retirement but also allows for flexibility in using the funds for various life expenses.

However, there are important restrictions to consider before making the rollover. The 529 plan must have been open for at least 15 years to be eligible, and the total amount that can be rolled over into a Roth IRA is capped at $35,000. Additionally, contributions and their earnings in the last five years are not eligible for the rollover, and once the funds are transferred to the Roth IRA, they cannot be rolled back into the 529.

Despite these limitations, the benefits of rolling over excess 529 funds into a Roth IRA are significant. Not only does it provide tax-free growth for retirement, but it also allows for penalty-free withdrawals for certain life events, such as a first-time home purchase, emergency expenses, or unreimbursed medical costs.

For parents or grandparents with children or grandchildren who have unused 529 funds, this new rollover option offers a valuable opportunity to repurpose those savings for their future financial well-being. By taking advantage of this provision early and strategically planning the rollover, individuals can maximize the benefits of tax-free appreciation inside the Roth IRA.

In conclusion, the SECURE 2.0 Act’s provision to roll over excess 529 funds into a Roth IRA presents a welcome alternative for young adults who have not fully utilized their college savings. This option not only provides a pathway to tax-free retirement savings but also offers flexibility in using the funds for various life expenses. By leveraging this opportunity, families can support their loved ones’ financial aspirations and ensure a secure future.

Rick Kahler, CFP, is a fee-only financial planner and financial therapist with a nationwide practice, Kahler Financial Group, based in Rapid City. His co-authored books include Coupleship Inc. and The Financial Wisdom of Ebenezer Scrooge.