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Why every child should have a 529 plan

January 26, 2024

Traditionally, 529 plans have been intended to help pay for the future cost of education for a child.  Starting in 2024 there is a huge benefit that had not been previously available.  The ability to convert unused money in the 529 account into a Roth IRA account.  Imagine being in your 20s again, and imagine if your family gave you up to $35,000 of tax free money.  Contributions into a Roth IRA can always be withdrawn without any taxes or penalties.  That is the opportunity that is now available.  There are a few stipulations to be aware of. 

-First, the 529 plan for the named beneficiary has been open for a minimum of 15 years.   

-The maximum amount that can be converted or rolled over to a Roth IRA is $35,000.  This will take several years to convert the money in the 529 plan due to the IRA contribution limits.  For example a person under the age of 50 is only allowed to contribute $7,000 into an IRA during 2024.  This would take five year of conversions at current contribution amounts to reach the $35,000 lifetime maximum. 

-Contributions, and earnings on the contribution, to the 529 account within the last five years would not be eligible to rollover into the Roth IRA. 

-If an individual (the beneficiary) makes any IRA contributions in a given year, that would reduce the amount able to be converted by the amount contributed.  In 2024, a contribution of $1500 to either a Traditional or Roth IRA would only leave $5,500 of eligibility left for conversion into a Roth IRA. 

-Finally, the transfer of funds would need to be a direct rollover, meaning the funds were sent directly from custodian to custodian.  An indirect transfer of funds are not allowed in this process. 

Thanks to the Secure 2.0 act, families are now able to set aside money for the benefit of their children or grandchildren.  There is no requirement that the beneficiary be related to the individual setting aside the money.  This could be utilized for a friend's child or unrelated loved ones.  Even if you fall into the "I am not paying for college" camp, this is still a powerful way to set aside money for a child's future benefit.  Think about having $35,000 of after tax money available for a down payment on a first home.  Being able to make a down payment on a first vehicle, or simply having an incredible head start on retirement savings.  The potential benefits of converting unused 529 plan funds into a Roth IRA could be life changing for a young adult.  That is why I feel every child should have a 529 plan for their benefit.