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How to use a 529 Plan to help your kids save for school, retirement, and their first home purchase

Updated: Jun 19, 2023


Setting your children up for financial success involves more than just saving for their education. By taking advantage of the 529 Plan and the 529-to-Roth IRA Transfer Rule from the SECURE 2.0 Act of 2022, you can also help them prepare for retirement and their first home purchase. This article will guide you through the process, detailing the benefits of an LLC and S Corp, rolling over 529 funds to your child's retirement account, and ultimately, creating a solid foundation for their future.

1. 529-to-Roth IRA Transfer Rule from the SECURE 2.0 Act of 2022

The SECURE 2.0 Act of 2022 brought significant changes to the 529 Plan, a tax-advantaged savings plan designed to encourage saving for future education costs. One of the most notable changes is the 529-to-Roth IRA Transfer Rule, which allows for the tax-free transfer of leftover 529 Plan funds, up to certain limits ($35k lifetime limit), to a Roth IRA after a child completes their higher education. This new rule enables parents to help their children save for retirement without incurring penalties or additional taxes, making the 529 Plan an even more attractive savings vehicle. Here are some other rules to consider:

  • The lifetime maximum a 529 beneficiary can transfer under the rule is $35,000;

  • The 529 account must have existed for at least 15 years;

  • No contributions or earnings on contributions from the last five years can be transferred; and,

  • The transfers are subject to annual Roth IRA contribution limits (but there is no upper income constraint).

2. Rolling Over 529 Funds to Your Child's Retirement Account

Once your child has completed their higher education and any remaining funds in their 529 Plan are no longer needed for educational expenses, you can take advantage of the 529-to-Roth IRA Transfer Rule. By rolling over the leftover funds into a Roth IRA, you can continue to grow the investments tax-free and help your child save for their retirement. It’s important to note that you can also use your leftover 529 Plan funds to pay for other relatives education expenses, withdraw some of the funds if you received scholarships, or even pay for some qualified student loans. However, we are going to focus on the 529-to-Roth IRA transfer rule here.

To rollover the funds, you'll need to establish a Roth IRA in your child's name, and they must have earned income in the year the transfer is made. The amount of the rollover is limited to the lesser of the remaining 529 Plan balance or the annual Roth IRA contribution limit, which is subject to change each year. Keep in mind that if the rollover amount exceeds the annual limit, the excess will be subject to income tax and a 10% penalty.

It's important to note that the 529-to-Roth IRA transfer must be made directly between the accounts to maintain the tax-free status. Consult a financial professional to ensure the transfer is executed correctly and to avoid any potential tax implications.

3. The Trifecta: Taking Advantage of the 529 Plan to Set Your Kids Up for a Successful Future

By utilizing the 529 Plan, you can help your children achieve three significant financial milestones: funding their education, saving for retirement, and purchasing their first home. The plan's tax-advantaged status allows the funds to grow over time, maximizing their potential.

In addition, Roth IRA withdrawal exceptions allow first-time homebuyers to withdraw up to $10,000 from a Roth IRA without incurring taxes or penalties. By transferring leftover 529 Plan funds to a Roth IRA, you not only help your child save for retirement but also provide them with a head start toward homeownership.

To ensure your child reaps the full benefits of the 529 Plan, consider the following steps:

  • Start contributing to a 529 Plan as early as possible to take advantage of compound interest and tax-free growth.

  • Monitor the account regularly and adjust the investment strategy as needed to ensure it aligns with your child's financial goals and risk tolerance.

  • Once your child completes their education, transfer the remaining 529 Plan funds to a Roth IRA to help them save for retirement and potentially their first home.

The 529 Plan is a powerful tool that can set your child up for a successful financial future. By taking advantage of the SECURE 2.0 Act's 529-to-Roth IRA Transfer Rule you can help your child save for school, retirement, and their first home purchase. Navigating these financial strategies can be complex, and it's essential to have the right guidance to make the most of your child's savings.

At Iota Finance, our team of experienced financial professionals is dedicated to helping families like yours secure a bright future for their children. To ensure your child's financial success for years to come, we invite you to schedule a free consultation with one of our experts. Together, we'll develop a tailored strategy that meets your family's unique needs and goals.

Don't miss this opportunity to give your child the gift of financial security. Contact Iota Finance today to schedule your free consultation and take the first step toward a prosperous future for your family.


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