Have Extra Savings in a 529? This Bill Would Let You Move It to Retirement Savings Penalty-Free

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  • The 529 rollover must land in a Roth IRA owned by either the owner of the 529 or a beneficiary.
  • Limitations include a minimum account holding period and a five-year lookback provision.
  • The legislation is currently being considered by the Senate Committee on Finance.

Your retirement savings might just get a bump thanks to this bill.

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 are one of the 14.83 million Americans with a 529 account, you may be eligible to give your retirement savings a boost, if this legislation goes forward.

The College Savings Recovery Act

The newly-introduced legislation would create a special tax rule allowing a rollover from qualified tuition reimbursement programs, such as a 529 plan, to Roth IRAs. The bill is the first of its kind: legislation relating to educational account rollovers. Currently, excess savings in a 529 account may be withdrawn at the expense of taxes and penalties for non-qualified distributions.

The new bill would change that by allowing for unused 529 funds to be rolled over into a Roth IRA owned by either 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

Limitations on usage

Those holding their breath in anticipation of a new backdoor Roth conversion opportunity will be disappointed. The bill defines certain holding periods and lookback provisions that make such a strategy less than ideal.

The legislation allows 529 to Roth conversions only if the 529 account has been open for longer than 10 years. Additionally, the amount that can be rolled over is subject to a five-year lookback. This means that the most you can roll over is equal to what the account was valued at five years previously. These provisions certainly take the punch out of the Roth conversion tactic, but may also be too limiting for families trying to drain their unneeded educational savings accounts, too.

What's next?

For now, the bill is in the very early stages of its existence. It was read twice before the Senate and referred to the Senate Committee on Finance. The bill's future is uncertain, as the Finance Committee will determine whether to proceed with the bill in its entirety, in part, or not at all. Even if it passes that hurdle, it still has a long way to go before becoming law.

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