I get a lot of questions about what to do with the unused portions of a 529 College Savings Plan. This happens more than one would think when a child receives a scholarship, chooses a less expensive school, or decides not to attend a university at all.
What does a parent now do with what’s left in the account?
A new law that took effect this year allows the unused portion of 529 College Savings Programs to be rolled over into Roth IRA’s. These funds can even be transferred on a tax free basis.
To be eligible…
1 – The 529 Account must have been open a minimum of 15 years.
2 – The amounts rolled over cannot include contributions made within the past five years.
3 – Funds must go directly from the 529 into a Roth owned by the beneficiary.
4 – The total amount rolled over cannot exceed $35,000 per beneficiary. If you have a different 529 Plan for each of your children, this limit to each child rather than in total.
5 – Recipients must have at least the amount of the rollover in earned income for that year. If the beneficiary only has $5K in earned income, then only $5K can be rolled over that year.
6 – The normal Roth Contribution Limits apply. In 2024 that limit is $7K.
7 – The normal income limits do not apply to recipients. Usually an individual earning more than $146K on a single or $230K on a MFJ return cannot make full contributions.
The Internal Revenue Service is yet to send out final rules for this new law so some of these eligibility requirements may change in the near future.
One potential issue with the law is changing beneficiaries. An existing option for owners of overfunded 529 Plans has always been to change the beneficiary to a different family member. Once your kids have gone to college, excess money can then be transferred to grandchildren for their educational expenses.
The question becomes whether or not such a transfer would again begin the 15 year minimum time clock for transfer. I’m sure our friends at the Service will weigh in on this potentiality in the near future.
Let me leave you with this.
Monday, September 16th, is the extension deadline for S Corp and Partnership Returns. It’s also the deadline to make your Third Quarter Estimated Tax Payments and deposits for the Illinois Pass Through Entity Tax Credit.
If you miss the filing deadline for your income tax returns, penalties normally run $195 per owner of the business per month. This can turn into a large bill rather quickly so let’s get your returns filed.
The extension due date for C Corps and Individual Income Tax Returns is October 15th. If you own an S Corp, that return will need to be completed before your 1040.
If you haven’t sent in your work yet, please get it into us today. If you need a good accountant, please watch the video below and schedule an appointment today.
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Chris Amundson
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