Rule change for college funds giving families additional options

PHOENIX (3TV/CBS 5) -- There is some good news for families saving for college. Starting next year, it will be possible to roll over unused funds from 529 accounts into a retirement account without tax penalties.

Maybe your child decided not to go to college, or they got a scholarship. What happens to the leftover money in a 529 college savings account? It’s a fear for many people wanting to start one. Starting in 2024, you will be allowed to roll over $35,000 into a ROTH IRA, which is a retirement account.

But there are very strict rules. “It is only for the beneficiary, not the account owner,” said Robert Farrington from The College Investor. “However, you can change the beneficiary on these accounts. So, let’s say you have more than $35,000 in the 529 plan. Then you change the beneficiary, and you can put it into another child, or the beneficiary could actually be yourself.”

It’s important to note that you still have to abide by the Roth contribution limits, which are much lower than the $35,000. Moving the money into the retirement accounts might take five or six years of annual rollovers.

Farrington also cautions every state is different and has its own 529 plan rules. “So even though Congress now allows the rollover from a 529 plan to a Roth IRA, your state might not,” he said. “And I think people need to remember that. Plus, every state is going to have to pass new rules to make this comply with their existing rules.”

Arizona law allows rollovers to another account within a financial institution once a year. Also, you can only move contributions that have been in an account for more than five years, which will take a lot of planning and research.

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