SECURE Act 2.0 Lets You Roll Over Your 529 CD

Your baby is born. Congratulations!

You might begin with a visit to Connecticut’s Higher Education Trust (CHET). Here, you’ll receive $100 deposited into your baby scholar’s new 529 college savings account, courtesy of the state of Connecticut. You’ll need every penny. The financial firm Vanguard estimates that 18 years from now college will cost close to $250,000 for a four-year public institution, and more than double that for a private school.

The CHET 529 plan offers myriad investment options, managed by Fidelity. Ideally, you make your choices then squirrel away money every month, the account bolstered, perhaps, by friends and relatives who kick in a little something for your little tyke’s birthdays and holidays. In Connecticut, your contributions to the CHET 529 plan are tax-deductible ($5,000 a year for a single filer and $10,000 for a joint return).

Over time, your investments (hopefully) grow. When college rolls around everything—the contributions and the gains—can be withdrawn tax-free, so long as the money is used to pay for qualified education expenses, which can include tuition, books, fees, supplies such as a computer and software, room and board, even Internet access.

In short order, little Junior is joined by Muffy, so you add to two 529 accounts each month. Years pass. The market chugs along without a major disruption. Junior decides to skip college for a job at a tech startup. Muffy gets a field hockey scholarship. Lo and behold, there’s money left in the kids’ kitty.

This is a nice problem to have and, in lower Fairfield County, not as unusual as it might seem.

“People fund 529s if they’re smart, and they grow. If you timed it right, they could grow more than you expect,” says Daniel Fitzgerald, principal-in-charge of the private clients group at Cummings & Lockwood in Greenwich. “Sometimes clients overdo it. What if a child doesn’t end up going to college? Or what if you end up putting too much in?”

Until recently, your options were limited. For example, you (the account holder) could transfer the balance to a different college-bound family member to be the new beneficiary; you could withdraw the leftover money, suffer the tax consequences and pay a 10 percent penalty; or the beneficiary could direct up to $10,000 of the excess money to repay federal or private student loans.

The federal SECURE Act 2.0, however, offers a new option. Beginning in 2024, beneficiaries of 529 plans can transfer up to $35,000 from their 529 plan to their own Roth IRA without paying penalties or taxes. Once in the Roth, that money can continue to grow tax-free. There are a few caveats, says Fitzgerald, who holds 529 accounts for each of his two children. For example, the plan has to have been open for at least 15 years, transfers are subject to Roth annual contribution limits (up to $7,000 in 2024) and beneficiaries must have earned income at least equal to the amount transferred.

LOOK AT YOUR OPTIONS

While 529 plans are popular vehicles for college savings, they aren’t the only prudent way to save for school. A trust fund can also be a viable option, Fitzgerald says. “If it’s structured right, it grows like a 529, but it’s not locked up or subject to a 10 percent penalty if not used for education expenses.” Gifts can also help. In 2024, one person may gift another up to $18,000 annually without tax consequences. Grandparents with funds to spare “can pay the tuition bill directly to the college, or pay a medical bill directly to the provider. It’s not considered a taxable gift that will eat into their gift tax exemption or their annual exclusion,” Fitzgerald says, adding “some grandparents with lots of grandchildren pay everyone’s tuition.”

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