OMG, My Student is Now an Adult!

As the parent or grandparent of young children, you might be thinking about the best way to save for college.  529 plans, introduced in the 1990s, are a great way to shelter investment for college from taxes.  BUT, as with all things there are drawbacks.

One worry clients routinely express is, what if they overfund the 529 account and their student(s) don’t need all of the money for higher education.  Nice problem to have!  But, worst case scenario (and there are many ways to avoid this), you can take money out of 529 plans for non-college reasons and the earnings will taxed and subject to a 10% IRS penalty.

Enter SECURE Act 2.0 with an exciting new provision.  Now, you can make an annual Roth IRA contribution direct from a 529 account.  Turning college money into tax-free growth for retirement.  Cha-ching!

The rules:

  • The most that can be transferred in total is $35,000.
  • Transfers into Roth IRAs are limited to the annual contribution limit.$6,500 in 2023.
  • The 529 plan that is being transferred must be 15 years old.
  • The Roth IRA must be in the name of the 529 beneficiary.No funding the parents’ retirement with the kids’ college money.
  • You can’t roll any contributions or earnings made in the past 5 years to a Roth IRA
  • You need to wait until 2024 to start.

So, here is another reason 529s are awesome.  Great for estate planning, great for college planning, and even great to start retirement for your youngster.


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