Recent legislation has made everyone’s favorite college savings plan a little more flexible. Funds in a 529 plan aren’t as locked up as they used to be now that your children’s unused college funds can be rolled into a retirement account.

In this episode, we’ll discuss an article from the White Coat Investor which explores how the 529 can be rolled into a retirement account. We’ll discover the benefits and drawbacks of using a 529 to save for retirement. Listen in to hear whether the 529 rollover could help you in your retirement.

Outline of This Episode

  • [2:12] Using unused 529 funds
  • [9:30] Utilizing spend-down strategies

Who benefits from a 529 account?

While The White Coat Investor is a publication written for doctors by a doctor, his retirement planning articles are valuable to anyone interested in planning for an even better retirement.

In this article, Dr. Dahle answers a question from one of his readers: Should they open a 529 with the intention of keeping it open for 15 years and then rolling it over to a Roth IRA?

Firstly it is important to understand a bit about the 529. The 529 is used as a tax-optimized savings account that a parent sets up for a child for their college education. In the past, it could only be used for college, but legislators have now allowed for the beneficiary to change and even allow up to a $35,000 conversion of to a Roth IRA if the 529 has been open for 15 years.

It should be noted that there are other uses for extra 529 plans as well. You can rename beneficiaries so that another student can use the account for their studies or the funds can be used for other qualified expenses.

The pros and cons of utilizing a 529 to save for retirement

Those of us retirement super savers are always looking to maximize tax benefits. While there are several benefits to using this tax advantage account compared with a taxable account, there are added risks and complexities.

The author compares the growth of funds within a 529 plan versus using a taxable account over a 17-year period while considering factors like investment returns, taxes, and fees.

One of the main drawbacks to relying on the 529 rollover is that you must have earned income at the time of the rollover, so if you are planning to rollover the funds in retirement, you may not have the earned income to do so.

Another point of contention is that you cannot roll over the entire $35,000 at once. The limit in 2024 is $7000.

Before you rush out and open a 529 for yourself you may want to look at rolling over your your 401K instead.

My takeaways

The article does a great job of exploring the pros and cons of opening a 529 for a future retiree seeking to maximize their tax advantages. Dr Dahle provides a specific, detailed analysis of what might be possible as a result of this new legislation. He also offers insights into its potential implications for individuals seeking to optimize their tax-advantaged savings and investment strategies.

Check out the article directly to explore his math or use his projections to try out your own numbers.

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