Read what Kelley C. Long, CPA/PFS has to say about utilizing the unspent funds in 529 accounts in this article.
Article from Journal of Accountancy
To alleviate some of the challenges that arise when funds are left unspent in qualified tuition plans, typically called Sec. 529 plans, once the beneficiary has completed their education, a new rule allows limited rollovers from 529 plans to Roth IRAs. This has also created new wrinkles for families with multiple children who have already started or even completed their educations.
Until the new rule goes into effect starting in tax year 2024, beneficiaries with leftover funds in a 529 account have had limited options to use these funds without triggering taxation and penalties on the growth of account assets. For families with multiple children, a helpful practice has been to fund 529 accounts for each child, knowing that leftover funds in one child’s account can be transferred to the 529 account of another child should they be unused.
This has worked well and will continue to be a useful option, but the new 529-to-Roth transfer, which was included in the SECURE 2.0 Act (enacted as part of the Consolidated Appropriations Act of 2023, P.L. 117-328) has some parents rethinking these transfers. That rule allows for up to $35,000 to be rolled into a Roth IRA so long as the IRA is in the name of the same beneficiary as the 529 and certain other requirements are met.
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Blog by Alex Kiritschenko, EA – Financial Advisor, Senior Tax Accountant
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Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.