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How New Rules Have Potentially Made 529 Plans More Attractive Thumbnail

How New Rules Have Potentially Made 529 Plans More Attractive

Personal Finance

My oldest son Jackson graduated from Saratoga High School in June of 2020.  This was the height of the pandemic and college was very much up in the air.  We had saved into a 529 plan for him for years but we were not sure if college was a fit.  One of the issues we ran into is if Jackson didn’t attend college what would we do with the 529 plan set up for him.  Were those dollars wasted?


What is a 529 Plan?


529 Plans are investment vehicles meant to help fund college education expenses.  They allow parents (and others) to contribute to a plan in the name of a child with the intention that the money is used for education expenses in the future.  Those dollars can be invested and grow tax free and distributions are tax fee if used for qualified expenses.  One of the historical downsides of 529 plans is that if the child does not go to college, then distributions will be subject to income tax and potentially penalties.   So one of the challenges parents faced was what if my child doesn’t go to college?


What if my kid doesn't go to college?


The good news is that the rules have changed.  Beginning January 1, 2024 unused 529 account funds may be transferred to a Roth IRA in the child’s name with no penalty.  


A couple rules to follow:

  • The transfer to the Roth must take place after 12/31/23
  • The 529 plan must have been maintained for a minimum of 15 years
  • The amount being transferred must have been contributed at least 5 years prior
  • The transfer from the 529 plan is subject to the annual Roth contribution limit and will count towards the child’s contribution limit for that year
  • The amount transferred is limited to an aggregate $35,000
  • The Roth IRA must be that of the designated beneficiary of the 529 plan


While there are some restrictions this change may have a major impact of planning for children’s future.  This opens a new avenue and answers the question “what if my child doesn’t go to college.”

 

Conclusion


So back to Jackson.  He took some courses at Adirondack Community College for about 2 years and realized college wasn’t for him so he entered the workforce.  We still had money in his 529 that we did not use.   Under the old rules our options would have been limited to giving him the money and paying taxes and penalties or transferring the money to one of Jackson’s younger brothers.  Neither option felt great as I didn’t want to “penalize” Jackson because college was not right for him.  Each child is different.  But now, beginning next year (2024), I will be able to transfer the money from his 529 plan into a Roth for him which will give him a head start on saving for his future.  So this ends up as a win for our family.


This strategy is not right for everyone but it does provide options which I am a big fan of.  If you would like to sit down and go over your own personal situation, I encourage you to reach out to our office.


Author: JT Cox, CFP®, ChFC®, BFA™️

Questions or comments please feel free to reach out to us.