A 529 plan is an education savings plan designed to encourage saving for future college costs. It is sponsored by states, state agencies or educational institutions and offers tax advantages and potentially other incentives to make it easier for families to save for college.
Contributions are made after taxes, but all earnings are free from federal and (in some cases) state taxes if used for qualifying higher education expenses.
If you don’t use your 529 plan and decide to take money out, your investments will likely be subject to taxation and a 10% penalty on the earnings portion of your withdrawal. You might also lose state income tax advantages if you withdraw funds without using them for their intended purpose.
In the past, the only real option for 529 funds that were not used for some kind of secondary education program was to roll the money over to another beneficiary, either for school expenses or to repay student loans. However, you will have another option beginning next year.
In December, President Joe Biden signed a $1.7 trillion spending bill that includes a provision allowing beneficiaries of 529 plans to roll over unused funds into a Roth IRA account without worrying about taxes or penalties.
“There are currently minimal workarounds for money not used if your child doesn’t go to college or doesn’t need the full amount of the 529 accounts,” Heidi King, an education and partnerships associate at College Inside Track, told Yahoo Finance. “A rollover option for unused savings in the 529 account allows a family to better utilize the investment opportunity without the fear of being penalized for leftover funds should a child decide against a post-secondary education or simply not need the entire amount.”
If you have had funds stranded in a 529 for at least 15 years, you’ll be able to roll it over into an IRA account after Dec. 31, 2023. However, it’s important to note that the amount you can roll over is subject to Roth IRA contribution limits. For 2023, the total contribution you make is limited to $6,500 — or $7,500 if you’re 50 or older.
Tricia Goss
