parents, grandparents and others have saved for a child’s future college
expenses through a 529 college savings plan, a tax-advantaged investment
vehicle. It’s an excellent way to save for rising college costs. Funds may be
withdrawn tax-free to pay for IRS-qualified expenses such as tuition, room and
board, books, and computers. In 2019, the passing of the Setting Every
Community Up for Retirement Enhancement Act (SECURE Act) also permitted account
holders to use a portion of 529 funds to pay student loans tax-free.
the plans have strict rules regarding withdrawals for nonqualified expenses,
making some hesitant to take advantage of an otherwise appealing savings
option. When distributions are taken for nonqualified expenses, earnings are
subject to a 10% penalty and will incur federal taxes. So if the beneficiary
decides not to go to college, quits before using all funds, or the account is
simply overfunded, withdrawals may incur a penalty.
2.0 Act, passed in December 2022, helps alleviate the overfunding concern.
Effective in 2024, distributions for nonqualified expenses may be rolled over
to a Roth IRA for the beneficiary without penalty or taxation. There are
specific requirements, including but not limited to:
ability to convert 529 funds to a Roth IRA offers families a unique legacy
planning opportunity. To set up a 529 plan, visit collegesavings.org and find your
state’s plan. If you are interested in converting excess 529 funds to a Roth
IRA, contact me or one of my colleagues for assistance.
USNews.com, “A Look at College
Tuition Growth Over 20 Years,” September 20, 2022.
Forbes.com, “529 Plan Rollover to
a Roth IRA,” April 12, 2023.
TheStreet.com, “How to convert a 529
plan to an IRA,” June 22, 2023.
Securities offered through LPL Financial (LPL), a registered
broker-dealer (member FINRA/SIPC). Insurance products
offered through LPL or its licensed affiliates. Investment advice offered
through Northwest Financial Advisors, a registered investment advisor and
separate entity from LPL Financial. Northwest Federal Credit Union (NWFCU) is
not registered as a broker-dealer or investment advisor. Registered
representatives of LPL offer products and services using Northwest Financial
Advisors and may also be employees of NWFCU. These products and services are
offered through LPL or its affiliates, which are separate entities from, and
not affiliates of, NWFCU or Northwest Financial Advisors. Securities and
insurance offered through LPL or its affiliates are:
The opinions in this article are for general
information only and are not intended to provide specific advice or
recommendations for any individual. To determine which strategies or
investments may be suitable for you, consult a qualified professional prior to
making a decision.