Many of our clients bring to our attention 529 plans that they have set-up for the benefit of their children or grandchildren. The plans get their name from Section 529 of the Internal Revenue Code and are more commonly referred to as prepaid college, qualified tuition plans, or college savings plans. These 529 plans are an excellent tool to ensure your child, or grandchild, has the resources they will need to complete their higher education. But, what if your child, or grandchild, does not use up all of the plan’s funds? What if they choose to skip higher education altogether?
Beginning this year, 2024, beneficiaries of a 529 plan will be able to transfer tax-free leftover, or unused, funds to a Roth IRA for their benefit. However, there are several requirements that must be met in order to avoid any unwanted tax consequences. The 529 account must have been open for a minimum of 15 years with the same listed beneficiary. There is a lifetime cap of $35,000, meaning an individual may transfer only up to $35,000 tax-free during their lifetime. Contributions made to a 529 plan in the previous five years will not be eligible for transfer. Finally, these transfers may not exceed the annual pay-in limit for Roth IRAs, which in 2024 is $7,000. Please note that any contributions made to an IRA owned by the beneficiary count against this annual pay-in limit. For example, if a 529 plan beneficiary contributes $4,000 to their traditional IRA, they may only transfer up to $3,000 of leftover funds to their Roth IRA in 2024.
Of course, this is only the newest option. Several others already exist. Parents can switch the designated beneficiary at any time and continue to use the funds for qualifying educational purposes. A maximum of $10,000 can be used to pay off qualifying student loans. Lastly, if a child earns a tax-free scholarship, parents may take an equivalent amount out of the 529 plan without being subject to the 10% penalty.
While 529 plans are an effective tool to assist your child, or grandchild, in accomplishing their educational goals, they are limited to just that: education. With a comprehensive estate plan, you will be better able to provide for all the future needs of your child and/or grandchildren. If you are looking to setup an estate plan to help provide for those you love most, speak with one of our estate planning attorneys who will be happy to assist you in accomplishing that goal.