529 - New Alternative to ROTH IRA for Kids?

[Asalted_Nut]

So from what I can tell, if you want to get your children set up with a ROTH IRA type account prior to them having a paycheck it seems like you can now do so with a 529! $35k limit however, but starting in 2024 you can transfer 529 funds to a ROTH IRA for the beneficiary once they do start working (within the yearly limits).

Am I understanding that correctly? That's pretty great! I mean 529's were always pretty great but there's always that question of what a child will choose to do post HS, or what changes to financial aid might look like, so having this option for the funds is swell.

EDIT: As I read further it looks like the account has to be open, and set to the same beneficiary, for 15 years. Still, tax free for those 15 just like a roth would be!

[Laura33]

So from what I can tell, if you want to get your children set up with a ROTH IRA type account prior to them having a paycheck it seems like you can now do so with a 529! $35k limit however, but starting in 2024 you can transfer 529 funds to a ROTH IRA for the beneficiary once they do start working (within the yearly limits).

Am I understanding that correctly? That's pretty great! I mean 529's were always pretty great but there's always that question of what a child will choose to do post HS, or what changes to financial aid might look like, so having this option for the funds is swell.

EDIT: As I read further it looks like the account has to be open, and set to the same beneficiary, for 15 years. Still, tax free for those 15 just like a roth would be!

Yep!  It's clearly designed to remove the fears of saving too much by giving you another outlet, so the 15-year limit makes sense from that perspective.  And the transfers are limited to the annual Roth contribution limit (I am assuming they will substitute for the Roth contribution you could otherwise make and not effectively double the annual contribution about, but I haven't confirmed that). 

It's certainly another excellent option for planners with the financial resources to save more than college will cost.  I think my DD will benefit; we just emptied her 529 to pay for her last semester, but my mom's 529 still has $$ left in it.  And coincidentally, DD just got an offer for her first post-graduation job, so if we can send her off into the world with employment, no college debt, and the beginnings of a retirement account, I'm seriously going to feel like we did something right. 

[YttriumNitrate]

I currently, myself and my two kids have 529 plans since I set up my plan before they were born and transferred my money into their accounts after they obtained social security numbers. These new rules have me thinking that it might be worthwhile setting up a 529 plan listing my wife as a beneficiary. Our youngest is still pre-K, so it will easily be 15+ years till we know if there's money left over. If there is, having the flexibility to roll $35,000 into my wife's Roth IRA could be useful.

Anyone else having similar thoughts?

EDIT: This new rollover law is particularly well timed as Indiana recently upped their 529 tax credit (not some measly deduction) to 20% on the first $7,500 per year (was first $5000), and the chances of us having money left over when the kids are done with school just went up.

[Asalted_Nut]

I currently, myself and my two kids have 529 plans since I set up my plan before they were born and transferred my money into their accounts after they obtained social security numbers. These new rules have me thinking that it might be worthwhile setting up a 529 plan listing my wife as a beneficiary. Our youngest is still pre-K, so it will easily be 15+ years till we know if there's money left over. If there is, having the flexibility to roll $35,000 into my wife's Roth IRA could be useful.

Anyone else having similar thoughts?

EDIT: This new rollover law is particularly well timed as Indiana recently upped their 529 tax credit (not some measly deduction) to 20% on the first $7,500 per year (was first $5000), and the chances of us having money left over when the kids are done with school just went up.

While I could be mistaken, as I was making this post the article I was reading said that only the beneficiary could receive the funds as a rollover, and that changing beneficiaries might cause that 15 year clock to reset. So I am not sure if you could set your wife as a beneficiary, change it to your child for any educational expenses, and then change it back to fund the ROTH.

However if you're talking about setting it up solely for the purpose of a ROTH conversation later for your wife and not for education funding for your children who have their own 529's, it could work it looks like- but 15 years is a fairly long time in terms of changes in laws and caveats and limits and such. I may be misunderstanding what you meant, of course!

[YttriumNitrate]

While I could be mistaken, as I was making this post the article I was reading said that only the beneficiary could receive the funds as a rollover, and that changing beneficiaries might cause that 15 year clock to reset. So I am not sure if you could set your wife as a beneficiary, change it to your child for any educational expenses, and then change it back to fund the ROTH.

This is definitely a case where I'll need to actually read the rules and regulations rather than just somebody's interpretation of them.

Depending on the harshness of the clock reset, I could just fund mine, and my wife's, 529 plans to $35,000ish and then transfer that money over to the kids accounts if they need it for education. That way, there's been no inflow of foreign cash into our 529 plans, and no potential reset of the clock.

[dabighen]

When my first three kids were born, I set up coverdells because they were slightly better and more flexible.  The new changes do not apply to them so I have to go through the conversionn nonsense.  Anybody know if congress is working to have this rule apply to ESAs as well?

Thanks,

Matt