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New Bill to Allow 529 Rollovers To Roth IRAs!?

I stumbled across an Instagram post yesterday (credit to wallstjunky) that detailed a new congressional bill that would completely change the game for parents saving money for their children!


Before we dive deeper, here are the essentials of what a 529 plan is (if you don’t already know):

  1. A higher education savings plan that allows parents to invest money strictly for future schooling purposes
  2. Offered by states and financial institutions (Vanguard, Fidelity, Schwab, etc.)
    • If you open a 529 with your state's plan, you may be able to deduct your annual contributions (up to a certain amount) from your state taxes
  3. Grow tax-free and withdrawals are tax-free, so long as the withdrawals are used for qualified education expenses
    • 10% penalty (from earnings, not contributions) on withdrawals not used for qualified education expenses

The 10% penalty (you would also owe taxes on earnings) for non-qualified education expenses has been one of the biggest deterrents for families in deciding if a 529 plan was right for them.

This bill (S. 4440) would essentially remove that deterrent while also allowing parents to beef up their retirement savings in the process!

Just imagine yourself in your mid-50s and your last child just graduated college, and their 529 plan still has $25,000 leftover in it. In the past, if you wanted to take that money out, you would owe the 10% penalty and taxes (on earnings) before you could spend any of it. If the bill is passed, it would allow you to easily roll over that entire $25,000 into your Roth IRA and supercharge your retirement savings just as you’re nearing retirement!

In my opinion, the passing of this bill would be just about as monumental as when the Roth IRA was created in 1997.

As much fun as it can be to poke fun at the federal government, this piece of legislation truly looks out for the average citizen. Crossing my fingers we hear more about this bill soon and that it eventually gets passed into law!


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