If you are saving up for college — or maybe a family member is doing it for you — a common tool is a 529 savings plan. A 529 plan is an investment account that offers certain tax benefits when the money it contains is used to pay for education-related expenses for its designated beneficiary.
In other words, if you use the money in a 529 plan to pay for tuition for the account’s beneficiary, you get certain tax benefits. There are other types of savings and investment plans to help pay for education-related expenses, too, such as prepaid tuition plans and education savings plans.
But again, the main draw of the 529 plan is the potential tax savings and benefits, which is why a lot of people use them.
Some people don’t actually end up using all of the money that they save in a 529 plan, though. Yes, it sounds weird — you have money, and didn’t spend it? — but it happens. If you find yourself in that situation, though, there’s a new option for what you can do with at money: Redirect it into a Roth IRA!
This is a new rule that was signed into law when Congress passed it, and the president subsequently signed an omnibus spending bill in December 2022. The new rules say that investors can take up to $35,000 of unused cash in a 529 plan, and roll it over into a Roth IRA. The only thing — you’ll need to wait to do it, because the new rules take effect in 2024.
So, it’s always good to have options, and if you do end up with unused money in a 529 plan, shoveling it over into an IRA can be a great choice when trying to determine what to do with it. In fact, it may be the best choice, depending on your specific financial situation.
Saving for retirement is critical, but many young people put it off in favor of other financial goals: Buying a house or car, for instance, or just having some fun. For that reason, if you’re able or otherwise in a situation in which this new rule allows you to stash your cash for retirement, it may be a good idea to do so. It’s not a bad idea to check with a professional, though, to make sure that you don’t have any outstanding education expenses to take care of first!
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