529 Plan: A new tax-deferred investment option?

[Chris]

The recently-passed Consolidated Appropriations Act just passed contains an interesting nugget: rollovers from 529 plans to Roth IRAs. It allows for $35k to be rolled over from a 529 to the Roth IRA of the beneficiary, provided the account has been opened for 15 years. So if you contribute $15k now and compound tax-free @6% for 15 years, you'd have $35k to roll into a Roth.

Worth it, or overly-complicated? Clearly, taking advantage of Roth contributions, backdoor contributions, and HSAs are simpler and more impactful. But those options are maxed out at ~$10k/yr for a single filer.

[bostonimproper]

We were going to have a 529 anyway for our kid, so this plus the ability to withdraw money equal to any scholarship or grant they receive (already on the books) makes us less worried about overfunding it.

Probably still makes sense to do even without kids in the mix if personal finance is a fun hobby for you and you can keep on top of it. If you’re 30 now, that’ll mean you do the rollover at 45. Assume another 15 years @6% until you hit min withdrawal age of 60 and you end up with ~$85K overall (or ~$70K in tax free gains). Assuming you withdraw everything then at a marginal capital gains rate of 15%, you save $10K or thereabouts on federal taxes if you do everything perfectly. That’s equivalent to like a 0.4-0.5%-ish boost in annual returns. It’s certainly not nothing, borderline “worth it”?

Edit: Apparently rollovers are still subject to the same constraints as annual contribution limits, no double dipping. This makes it significantly less attractive a route for non-kid people.

[MBBboy]

Agreed. The contribution constraints means this isn't worth fooling with

[Hristo Botev]

So, does this mean that if one or both of our kids decide NOT to go to college (something I often pray happens!), or get scholarships, or grandparents pay for college, or college expenses miraculously become "free," this means that we can rollover their 529 account money into retirement accounts for them? Is this a means by which to transfer wealth to the next generation without taking a huge hit? Seems to good to be true.

[bostonimproper]

So, does this mean that if one or both of our kids decide NOT to go to college (something I often pray happens!), or get scholarships, or grandparents pay for college, or college expenses miraculously become "free," this means that we can rollover their 529 account money into retirement accounts for them?

Yes, but only up to the aforementioned $35K max, which you’ll need to rollover over the course of 7-8 years at current annual limits. Also it is as yet unclear whether the 15-year timer resets if you change the beneficiary of the account, so you should have the 529’s set up as separately for each child.

Also, it’s already been the case if your kid gets a scholarship or grant that you can pull that out of the 529 without the 10% penalty dollar for dollar, though you’ll still be taxed on the earnings.

A common thing I see suggested on other financial forums is to use leftover 529 money towards funding grandchildren educational expenses and just let it keep compounding for the next generation.