529 plans have long been a trusted tool for saving for education expenses, offering tax advantages and flexibility for families. Now, with a recent rule change, they’ve become even more valuable.
Unused 529 funds can now be rolled over into a Roth IRA tax-free, providing a new way to transition education savings into retirement security. Let’s explore how this exciting update adds to the benefits of 529 plans—and how to handle any leftover funds.
Roth IRA Conversion: A New Option
A major update to 529 plans allows you to roll over unused funds into a Roth IRA tax-free after 15 years. While subject to annual Roth IRA limits and a lifetime maximum of $35,000, this feature provides a tax-efficient way to ensure unused funds don’t go to waste.
This change is especially helpful for families who may have leftover funds due to scholarships, changes in education plans, or other reasons. Instead of worrying about unused money, you can give the beneficiary a head start on retirement savings. It’s a seamless way to maximize the value of your contributions.
What to Do with Leftover 529 Funds
If you end up with unused 529 funds, you have several options:
- Rollover to Roth IRA: Take advantage of the new Roth IRA rollover option to repurpose funds for retirement savings.
- Withdraw Funds: While withdrawing funds for non-qualified expenses incurs taxes on earnings and a 10% penalty, contributions remain tax- and penalty-free.
- Change the Beneficiary: You can transfer the 529 plan to another family member who may need it for education.
- Save for Graduate School: Funds can be kept for the beneficiary’s future graduate school expenses.
Tax-Free Growth for Education Expenses
While the new Roth IRA feature and options for unused funds add flexibility, the primary benefit of a 529 plan remains its tax-free growth for qualified education expenses.
Funds grow without federal taxes, and withdrawals for costs like tuition, books, and technology are tax-free.
State Tax Benefits Enhance Savings
Many states offer additional incentives, such as deductions or credits on state income taxes for contributions to 529 plans.
For example, Missouri residents can deduct up to 8,000 annually per taxpayer (16,000 for couples). These perks make 529 plans an even more compelling choice for families looking to save strategically.
Flexibility for K-12 and More
529 plans aren’t limited to college expenses. They can also be used for K-12 tuition at private or religious schools, with a limit of $10,000 per year. This makes them a flexible solution for families with varying education needs.
Education and Retirement Savings in One
With the new ability to roll over unused funds into a Roth IRA, 529 plans have evolved into a dual-purpose savings vehicle. They’re not just for education anymore—they’re also a smart way to set up long-term financial security for their beneficiaries.
Whether you’re planning for college, private school, or looking for retirement flexibility, 529 plans are a strategic choice.
With tax-free growth, potential state tax benefits, and now the added Roth IRA conversion feature, 529 plans are more versatile than ever.
More Information
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Angelo Ceko
Angelo Ceko is a Staff Accountant at Smith Patrick CPAs, specializing in bookkeeping, tax compliance, financial statement analysis, and reconciliation. He earned his Bachelor of Science in Accountancy from Webster University and was named one of the top 100 Business People to Know by St. Louis Small Business Monthly in 2023. Angelo is dedicated to providing timely, accurate financial insights that help clients make informed decisions.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.