My child just graduated from college and has funds remaining in their 529 college savings plan. What are my options?

There are a number of things that could happen that might leave you with additional funds in one of your children’s 529 college savings plan. Luckily for you, our Columbus, OH financial advisor firm has a team of experts to advise on what option(s) would be best for your situation. Let’s walk through them.

    1. Distribute funds out of 529 for any scholarships your child received1
      • If your child received a scholarship to pay for all or a portion of their college education, non-qualified withdrawals from their 529 (up to the amount of the tax-free scholarship) can be taken out penalty-free
      • Income tax will still be due on the earnings in the 529, thus turning your tax-free 529 into a tax-deferred 529
      • Military Academy Exception – If your child attends a US military academy and does not need the funds in their 529, a non-qualified withdrawal can be taken from their 529 up to the estimated cost of attending the military academy without incurring the 10% federal tax penalty (the earnings portion will be subject to tax). 
    2. Keep funds in 529 for additional education your child may be interested in2
      • There is no time limit or age limit for keeping a 529 college savings plan open. Thus, funds can be kept in the 529 for additional qualified education expenses that may be incurred by the beneficiary later in their life when attending qualifying graduate school, law school, medical school, etc.
      • 529 distributions for qualified education expenses should be done in the same tax year the expenses were incurred. 
    3. Student loan repayment3 ***Allowed by most states and most 529 plans
      • The SECURE Act, passed in 2019, allowed qualified education loans’ (qualifying student loans and parent education loans) principal and interest to be considered a qualified education expense, up to $10,000 per borrower (lifetime limit across all 529 plans for one beneficiary).
      • This allows distributions from 529s to be tax-free and penalty free if used for student loan (and parent education loan) repayment for the 529 beneficiary and the 529 beneficiary’s siblings (includes brothers, sisters, stepbrothers, stepsisters).
      • ***Qualified education loans include all federal loans and most private loans, but some private loans do not qualify, so we recommend verifying your loan qualifies before moving forward.
      • ***Some states have not adopted the new federal definition of qualified education expenses. We recommend confirming your state’s 529 qualifies before moving forward. Find out if your state conforms here.
    4. Transfer 529 funds to a new beneficiary4
      • A 529 college savings plan can only have one beneficiary. However, the owner of the 529 can change the beneficiary of the 529 to a qualifying family member of the current beneficiary at any time without tax consequences.
      • If the 529 beneficiary is changed, we recommend revisiting the 529s investment selection to make sure it is aligned with the new beneficiary’s education timeline.
      • If the beneficiary is changed to a qualifying family member who has not reached college age, the 529 may be used for private school education. Some states (including Ohio) will allow up to $10,000 of 529 funds per year be used for K-12 private school education.
    5. Rollover to a Roth IRA (subject to limitations)5 
      • The SECURE Act 2.0, allows for 529 plan account owners or beneficiaries to rollover 529 funds into a beneficiary-owned Roth IRA tax-free and penalty-free as of January 1, 2024, subject to limitations described below:
        • The rollover amount from a 529 plan to a Roth IRA will be subject to the Roth IRA annual contribution limits set by the IRS ($7,000 for individuals under age 50 and $8,000 for individuals over age 50 in 2024).
        • The beneficiary must have earned income equal to at least as much as the amount of the rollover in a calendar year.
        • Individuals with income exceeding the amount to contribute directly to a Roth IRA are still eligible for this option.
        • There is a $35,000 lifetime limit per beneficiary for 529 plan rollovers to Roth IRAs.
        • To rollover funds from a 529 college savings plan to a Roth IRA, the 529 must have existed for 15 years.
        • Contributions and earnings on contributions made to the 529 in the last five years are not eligible for rollover to a Roth IRA.
        • Since this option is still new, there are some grey areas that need to be clarified. For example, if the beneficiary of a 529 is changed, does the 15-year clock restart; does the rollover to a Roth IRA count for your contribution in that particular year or can you also make a contribution up to the allowable limit to a Roth IRA / IRA?
    6. Distribute funds out of 529 for other expenses and close the account6
      • The earnings portion of a non-qualified 529 distribution will be subject to a 10% withdrawal penalty and income tax.
      • The contribution portion will never be taxed or penalized since it was made with after-tax dollars

 

If you have any questions about your 529 college savings plan, your Summit financial advisor team is here to help.

 

 

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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Summit Financial Strategies, Inc. (“SFS”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from SFS. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. SFS is neither a law firm, nor a certified public accounting firm, and no portion of this content should be construed as legal or accounting advice. A copy of SFS’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.summitfin.com. Please Note: If you are a SFS client, please remember to contact SFS, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. SFS shall continue to rely on the accuracy of information that you have provided. Please Note: If you are a SFS client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

               

              SOURCES

              1. Distribute funds out of 529 for any scholarships your child received
              2. Keep funds in 529 for additional education your child may be interested in
              3. Student Loan Repayment
              4. Transfer 529 funds to a new beneficiary
              5. Rollover to a Roth IRA (subject to limitations)
              6. Distribute funds out of 529 for other expenses and close the account

               

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