In an unexpected and significant policy shift, 2024 brought a transformative change to 529 college savings plans. Families can now roll over unused 529 plan funds into a beneficiary’s Roth individual retirement account (IRA) tax-free, provided the 529 plan has been active for at least 15 years. This new provision presents a financial avenue previously unseen, allowing families to retain flexibility and ensure that their savings don’t go to waste if educational plans evolve. Early data from ISS Market Intelligence reflects the enthusiasm surrounding this policy; in just the first half of 2024, a staggering $100 million was transferred across 15,000 529 plans to Roth IRAs.
This policy change is noteworthy as it addresses a long-standing concern regarding the inflexibility of 529 plans. Historically, these accounts were restrictive, ultimately tying funds to education-related expenses, which included tuition, fees, books, and living expenses. The modern version of these plans has evolved slightly to include expenses like apprenticeship programs and continuing education, but still largely pigeonholed funds intended solely for educational use. The new Roth IRA rollover option has drastically broadened the scope, with 23% of parents indicating that the 529-to-Roth rollover feature significantly influenced their decision to open a 529 plan, according to a survey by Saving For College.
While families have begun to explore this potential, the anticipation for a boost in 529 enrollments has been met with an even more immediate response than experts expected, with numerous families already leveraging the new policy. It’s a clear signal of changing attitudes toward college preparation and financial planning that address both immediate educational needs and long-term financial security.
The emerging flexibility with 529 plans is a beacon of hope for many families who contemplate their financial futures against the backdrop of increasing tuition costs and student debt concerns. With the average expense of attending college skyrocketing — with some institutions reporting nearly $100,000 per annum — families feel pressured to make informed decisions about their savings options. Furthermore, the report indicated that 76% of those yet to adopt a 529 plan would be incentivized to do so because of the new rollover provision, signaling a growing recognition of these plans’ advantages.
Moreover, the attractive proposal extends its influence on existing account holders; 57% of families with 529 accounts express intentions to increase their contributions toward these plans due to the newly introduced Roth rollover benefit. Observers note that this renewed enthusiasm for contributions denotes a shift in financial planning priorities, wherein parents are now considering long-term outcomes rather than merely addressing current educational expenses.
A significant barrier to the widespread adoption of 529 plans previously stemmed from the concern about overfunding — uncertainty lingered whether excess savings would become a penalty when withdrawn from education-dedicated accounts. As wealth advisor Vincent Birardi notes, the previous restrictions posed significant hesitancies, as account holders were wary that their funds would be heavily taxed should their children not require the entire amount for their educational pursuits. The introduction of the 529-to-Roth rollover is seen by many financial advisors as the “icing on the cake,” relieving fears of wasted resources and ushering in increased participation.
Martha Kortiak Mert of Saving For College suggests that this new flexibility effectively dismantles the hurdles that previously prevented families from committing to 529 plans. By expanding potential applications of these accounts, families are now more likely to consider them seriously as part of their overall financial strategy.
Despite the alluring benefits of this policy change, it’s essential to note that there remain certain stipulations. Funds must be transferred in adherence to the 15-year account rule, disallowing rollovers from contributions made within the last five years. Additionally, transfers are subject to an annual Roth IRA contribution limit, and there exists a $35,000 lifetime cap on 529-to-Roth transfers. Nonetheless, these limitations are still deemed manageable compared to the opportunities presented, as experts advocate for embracing the 529 plan’s strategic advantages.
This year has concluded with an impressive uptick in the total value of assets within 529 plans, climbing to $508 billion — an increase of nearly 13% from the prior year. As families navigate the complexities of funding higher education, newly broadened 529 features not only ease concerns over overfunding but also encourage proactive financial contributions amid escalating college costs.
The expanded parameters for contributions make a 529 plan even more enviable. Newly introduced allowances permit individuals to contribute up to $18,000 per child ($36,000 for couples filing jointly) without it impacting their lifetime gift tax exemption, a marked increase from previous years. The opening of additional funding channels, including strategies for superfunding, has illuminated a path for high-net-worth families to contribute significantly toward a descendant’s educational future without the fear of immediate tax implications.
The 529-to-Roth IRA rollover initiative defines a groundbreaking era in college savings, promising to ease burdens on families while laying the groundwork for effective financial strategies aimed at education savings. By increasing engagement with these plans, this shift not only emphasizes the necessity of preparing for college expenses but also promotes a holistic view of long-term financial health.