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Facelift for the 529 College Savings Plan

| March 13, 2023

With recent law changes, 529s just got a whole new look, or at least deserve a new one from investors.  A 529 College Savings Plan is a very common way to put funds away for a child’s education.  For the state of Wisconsin, there is a state tax deduction on contributions for each beneficiary (to a certain point), funds build tax-deferred, and money can be taken out tax-free if used for college expenses. 

But what if the beneficiary (or child) doesn’t go to college, gets a scholarship, or doesn’t need all of the funds?  Previously, parents were left with few options:  either change the beneficiary to another child/beneficiary or take the funds out for non-college expenses and pay the associated tax and penalties. 

Until now.  Starting in 2024, with the passing of the SECURE Act 2.0, there will be another option for parents:  A Roth IRA.  Next year, unused funds in a 529 plan can be transferred to a Roth IRA for the beneficiary of the 529.  Some things to consider:

-The aggregate lifetime amount that can be transferred is $35,000 per beneficiary

-The Roth IRA must be in the name of the 529 beneficiary

-The annual transfer amount cannot be more than the annual contribution limit to a Roth IRA ($6,500 for 2023)

-The beneficiary is subject to the same earned income requirements as the Roth IRA

-The 529 must have been established for 15 years before the transfer

-Contributions made over the last 5 years to the 529 or not eligible to transfer

-There are no income limits for the beneficiary to make the transfer from the 529 


This opens a whole new opportunity for parents that are looking to put funds away for their kids for the long-term.  Many parents want to start a Roth IRA for their children but aren’t able because their child has no earned income.  The way around this for business owners is to pay their child through the business (modeling fees, work around the office, etc.) to show “earned” income, but non-business owners don’t have these tools.  This new 529 rule allows funds to be deferred for the lifetime of a child and taken out tax-free for retirement.


Think of this:  Mom and Dad start funding a 529 for a newborn at $100 per month and then stop after 18 years.  Assuming an 8% rate of return, that 529 would be worth approximately $48,000 when the child turns 18.  If those funds are then transferred to a Roth IRA and allowed to defer for another 42 years (until the “child” turns 60), the now-adult would have around $1,216,000 in a Roth IRA available tax-free! 


Take it a step further:  Given current rules, there are no requirements to distribute funds out of a Roth IRA, i.e. no Required Minimum Distribution.  If there is no need for the funds for retirement, those funds would pass on to grandchildren to be taken out tax-free.  Assuming a life expectancy of 90 and a continued 8% rate of return, over $12,200,000 would be passed on to the next generation!  All from a $100/month contribution to start with no taxes paid.  Ever.