New option for unused 529 plan funds

Published September 18, 2024
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While 529 account owners are now allowed to roll over unused 529 assets to a Roth IRA for the beneficiary, subject to certain criteria and limits, please note that Edward Jones does not have the capability to complete this rollover today.

For parents, saving for a child’s education in a 529 education savings account has always come with some questions. What if your child decides not to go to college? Or, what if they receive a sizable scholarship and you end up having more assets than you need in your 529 account?

If you’ve been hesitant to save in a 529 account because you’re not sure if your child will go to college, or if you think you already have more assets in your 529 than you need, a provision in the SECURE 2.0 Act could help you.

The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0), which was signed into law on Dec. 29, 2022, contains more than 90 provisions designed to strengthen the retirement savings system by extending and expanding savings opportunities and easing administrative requirements. The effective dates vary greatly, with some provisions effective immediately, while others are deferred several years into the future.

Navigating the benefits of new laws for your unused 529 Plan contributions

Funds withdrawn from a 529 are required to be used for qualified education expenses; otherwise, taxes and penalties could be owed. Even if the withdrawn amount qualifies for a penalty exception (for example, your student earned a scholarship), you still owe taxes on the earnings portion of the withdrawal.

This new law provides some enhanced flexibility for unused 529 assets. 529 account owners can roll over unused 529 assets to a Roth IRA for the beneficiary, subject to certain criteria and limits. With more students forgoing college for a variety of reasons, this new law couldn’t have come at a better time.

Rules we know for rolling over unused 529 funds to a Roth IRA

While it’s only been a short time since the law passed, here’s some of what we know now (as of April 2024):

  • This provision of SECURE 2.0 took effect Jan. 1, 2024.
  • The rollover must be into a Roth IRA for the beneficiary of the 529. This person may or may not be the same as the account owner.
  • The contributions (and applicable earnings) being rolled over must have been in the 529 account for at least five years prior to taking the distribution.
  • There is a maximum $35,000 lifetime limit per beneficiary.
  • The amount that can be rolled over annually is limited to the annual IRA contribution limit minus contributions made.
  • The beneficiary must have taxable compensation to receive the 529 rollover.
  • The income limits that normally apply for Roth IRA contributions are waived.

Additional options for unused 529 funds

There are many options for avoiding federal taxes and penalties on unused 529 funds. They include things such as changing the beneficiary to a sibling who might use the funds or paying off student loans (subject to certain rules and restrictions). A financial advisor can help you understand the options available so you can determine your preferred use for any leftover funds.

However, there are still some open questions regarding the 15-year rule

While the enhanced flexibility is favorable, we have several questions about how this provision works. For example, one of the eligibility requirements is the account must have been opened for at least 15 years prior to taking the distribution (to be rolled over); however, it’s unclear whether the account must be opened and maintained for the 529 beneficiary for at least 15 years. We are awaiting further regulatory guidance on this matter.

How Edward Jones can help

Consult with your Edward Jones financial advisor to determine if or how your education savings strategy should change based on this new law.