The 529-to-Roth Switch: A Game-Changer in College Savings

A common conundrum most parents face is whether to dive into Section 529 college savings programs (often simply known as 529 plans). The big worry? They aren’t certain if their little ones will strut off to college or snag scholarships that will take care of the bills. But a recent legislative move is looking to quell those concerns.

What’s the Big News?

Introduced in the SECURE 2.0 Act of 2022, Section 126 is the new kid on the block. Starting from 2024, this rule lets you effortlessly shift those unused 529 college funds right into Roth IRAs. In simple terms, this means any college savings left untouched can smoothly transition into retirement savings – and guess what, the tax boogeyman won’t touch it.

The Backstory

Before this shiny new rule, if your kid graduated and there were still dollars left in the 529, you had a pretty limited playbook:

• Hand over the cash to another family member.
• Use up to $10k to tackle student loans.
• Or, pull out the money and potentially get a surprise from the taxman.

Many families, playing it cautious, chose other less tax-friendly avenues.

Why This Change is a Breath of Fresh Air

The aim of this 529-to-Roth maneuver is simple. It wants to make families more at ease with investing early in a 529 plan, without the constant worry of overstepping and ending up with tax hitches. However, (and there’s always a ‘however’, isn’t there?) there are certain strings attached:

• You can transfer up to $35,000 over your lifetime.
• The 529 account needs to be at least 15 years mature.
• No shifting of recent contributions or their growth (from the past five years).
• And, always keep an eye on the annual Roth IRA contribution limits.

Real Talk: Margo’s Scenario

To paint a clearer picture, let’s walk in Margo’s shoes. With a 529 set up in 2000 and continuous contributions till her graduation in 2022, she found herself with a chunky $33k still sitting there. Enter 2024 and our new rule. Margo can now start migrating that money into her Roth IRA, bit by bit, each year, provided she stays within the Roth IRA’s yearly limits.

There are a few curveballs to keep in mind, of course. Like if Margo decides to add to her Roth herself or if she earns a limited amount in a particular year. Also, the age of her 529 account and recent contributions can play a role in when and how much she can transfer.

Bottom Line

In the labyrinth of saving and planning for a child’s educational future, the 529-to-Roth switch might just be that secret passage you were looking for. It’s more than just flexibility – it’s giving families the assurance to save without the looming cloud of “what if?”.

So, here’s to making informed choices, maximizing savings, and ensuring our kids (and our retirement) get the best! Until next time, happy saving!