Posted on: November 25, 2024
The decision to open a 529 college savings plan to save for a child’s future education costs seems like an easy one. There are tax benefits to opening an account, and earnings grow on a tax-advantaged basis. When funds are withdrawn for qualified education expenses, the money is tax-free.1
Funds have been used for apprentice programs, continuing education classes, and student loan payments in recent years as the definition of “qualified education expenses” has broadened.2
Still, many parents have hesitated to invest in 529 plans, tying up money for college that their child may not need or use.
What’s New in 2024?
Starting in 2024, parents can roll over unused 529 account funds to the beneficiary’s Roth individual retirement account (IRA) without penalties or income taxes. There are limitations to the rule.
- The 529 plan has to be open at least 15 years before a Roth IRA rollover can be used.
- Account contributions can only be rolled over after five years.
- Rollovers are subject to the annual Roth IRA contribution limit.
- There’s a $35,000 lifetime cap on transfers from a 529 plan to a Roth IRA.2
How Has This Impacted 529 Funding?
The flexibility offered by the Roth IRA rollover benefit has caused many parents to open new accounts who were reluctant to tie up funds for future education costs. Others with accounts have increased their investing.
A Saving For College survey found that 72% of those surveyed were aware of the new rule offering greater flexibility to 529 plans. Of those with 529 plans, 57% indicated they are more likely to increase their plan contributions based on the new benefit. Among the 14% of respondents who don’t yet have a 529 plan, 65% of them said the new rule makes them either “much more likely” or “somewhat more likely” to open a 529 plan.
In a recent report by Saving For College, 23% of parents said the new Roth IRA rollover benefit was a major factor in the decision to open a 529 plan.
How Does the Rollover Work?
To initiate a transfer, first contact your 529 plan provider to see if the rollover benefit applies. Then, you’ll need to contact your Roth IRA custodian for help with the process and completion of paperwork. (According to Forbes, not all states allow 529 to Roth IRA conversions.)
Many with 529 plans who have been unable to access funds penalty-free have already taken advantage of the new benefit. According to ISS Market Intelligence, $100 million in assets from 15,000 529 plans was transferred to Roth IRA accounts in the first half of 2024.
How BenefitEd Can Help With 529 Plans
Now more than ever, opening a 529 college savings plan is a great way for employees to save for future education expenses. All state-sponsored programs qualify for BenefitEd’s Employer-Assisted College Savings.
Offering this benefit can help incentivize employees to start a 529 college savings plan. With our flexible plan, you decide who receives your employer-assisted benefit and how much you’ll contribute. BenefitEd can assist with administration of the college savings program, freeing up your time.
Trust Us With All Your Education Benefits
BenefitEd’s experts can help your employees saving for future family education costs. But we understand that you’re meeting the diverse needs of many employees—not just those saving for the future. That includes employees with student loans and those financing their education now.
Learn more about other flexible education benefits we offer to help with these competing financial priorities, such as Employer-Assisted Student Loan Repayment and Tuition Reimbursement. Contact our team for more information about any of our products today.