Got extra savings in a 529? This Bill Would Let You Move It To Retirement Savings Without Penalty
Your retirement savings could well increase thanks to this bill.
- The 529 flip should land in a Roth IRAstyle=”text-decoration: underline”> belonging to the owner of the 529 or a beneficiary.
- Limits include a minimum account holding period and a look-back provision of five years.
- The bill is currently being reviewed by the Senate Finance Committee.
Senate Bill 4400, also known as the College Savings Recovery Act, may be a short piece of legislation, but the implications could be far-reaching. If you’re one of the 14.83 million Americans with a 529 account, you may be eligible to get your retirement savings boosted, if this legislation goes through.
The College Savings Recovery Act
The newly introduced legislation would create a special tax rule allowing qualified tuition reimbursement programs, such as a 529 plan, to be transferred to Roth IRAs. The bill is the first of its kind: education account rollover legislation. Currently, excess savings in a 529 account can be withdrawn at the expense of taxes and penalties for unqualified distributions.
The new bill would change that by allowing unused 529 funds to be rolled over into a Roth IRA held by the 529 owner or beneficiary. This provision would allow college savings to translate directly into tax-free retirement savings. for parents and students.
Read more: Our Best Roth IRA Accounts
Those holding their breath in anticipation of yet another backdoor Roth conversion opportunity will be disappointed. The bill defines certain holding periods and look-back provisions that make such a strategy less than ideal.
Legislation allows 529 to Roth conversions only if the 529 account has been open for more than 10 years. In addition, the amount that can be carried forward is subject to a five-year look-back. This means that the maximum you can carry over is equal to the value of the account five years ago. These provisions certainly mitigate Roth’s conversion tactic, but may also be too restrictive for families who are also trying to empty their unused college savings accounts.
At the moment, the bill is in the very early stages of its existence. It was read twice in the Senate and referred to the Senate Finance Committee. The future of the bill is uncertain, as the Finance Committee will determine whether to move forward with the bill in its entirety, in part, or not at all. Even if he clears this hurdle, he still has a long way to go before he becomes law.
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