Your 529 College-Savings Plan Can Now Fund a Roth IRA - Saunders, WSJ

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It happens more than you think, given the spiraling costs of college: People who save money for a child’s education expenses in tax-favored 529 plans wind up with leftover dollars in them. Perhaps the student got a scholarship or chose a lower-cost school—or even took a different path in life.

Now there’s a new way to tackle this problem. A law that took effect this year allows unused 529 funds to be transferred to Roth IRAs tax-free, up to certain limits. Often this move will cost less than simply withdrawing extra funds, which could bring taxes and a penalty. Roth IRA sponsors, including Fidelity Investments, Vanguard Group, and Charles Schwab, are ready for these rollovers and have posted forms for them on their websites. While the Internal Revenue Service still needs to clarify some issues, many 529 owners aren’t affected and can proceed.

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First, it’s important to know that 529-to-Roth rollovers are meant to be a modest solution to a modest problem; they aren’t a boondoggle. In general, Congress has plugged potential loopholes. As a result, these rollovers come with key limits. To be eligible, a 529 account must have been open at least 15 years, and rollovers cannot be contributions added in the last five years. The rolled-over funds also must go directly from the 529 plan into a Roth IRA owned by the beneficiary.

In addition, 529-to-Roth IRA rollovers cannot exceed a total of $35,000 per beneficiary, although it’s unclear how this will be tracked. However, someone who owns several 529 accounts—say for different children or grandchildren—could have a $35,000 rollover limit for each one. Rollover recipients also face other requirements that generally apply to Roth IRAs. Each recipient must have at least as much earned income as the rollover—so a beneficiary whose pay is $4,000 in a year could only qualify for a $4,000 rollover of 529 funds.

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https://www.wsj.com/personal-finance/taxes/529-roth-ira-rollover-3e4850aa?st=AU61Da&reflink=desktopwebshare_permalink

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[Happy Hoosier]

1. I'm expecting a modest remaining balance on my daughters' account.

We're lucky here. My daughter attends a University where my wife is tenured faculty and we get a large discount on tuition. Still have to cover fees, materials, etc. And she lives with some roommates in a house near campus. But overall, we're getting off cheap. I hope we'll have $10-20K left at the end, which will be a decent start for her.

[PoindexterOglethorpe]

2. I did not know that!

I know someone with a whole bunch of unused 529 money who will be happy to learn this.