The new 529-to-Roth IRA transfer rule may help parents maximize the next generation's educational savings and avoid unwanted taxes.
For years, the 529 plan has stood out as a favored method to set aside funds for college. Yet many parents have approached these plans with caution, wary of the financial penalties they might face if the beneficiary either chose not to pursue higher education or didn't utilize the entire balance.
The introduction of a potentially game-changing rule intends to make the prospect of contributing to a 529 plan more appealing. Beginning next year, beneficiaries can transfer unused 529 funds to a Roth IRA, allowing parents to sidestep unwanted tax penalties and redirect their contributions toward the beneficiary’s retirement savings.
Ultimately, the new 529-to-Roth IRA transfer rule may make it easier to fund the next generation’s education by eliminating some of the previous risks involved with overfunding a 529 plan. However, it’s important to understand how this rule works, as well as its limitations, to maximize the potential benefits.