College Savings Might Come in Handy for Retirement

I know it’s obvious, but when you spend money on one thing, you can’t spend it on another — and the same goes for saving money. Whatever you save for education is cash you can’t save toward retirement. But the SECURE 2.0 Act, passed in December, is changing that.

One part of the new rule directly affects a family’s financial planning because it opens an avenue to transfer money in a 529 account to a Roth IRA. There are a few restrictions: the account must have been open for 15 years. You can transfer only $35,000 to the Roth IRA. And the two accounts must have the same beneficiary.

“The main thing people need to know about this new rule is that it takes the worry, ‘What if my child/children don’t end up going to college?’ out of the equation,” says Marshall Nelson, an advisor at Crewe Advisors in Salt Lake City. “Now, you’re able to have it go towards a retirement account that grows tax-free. It’s a phenomenal solution.”

It’s a significant motivator for families to start saving early for their kids’ college education, says Tom Henske, a  certified financial planner and the author of It Makes Total Cents: 12 Conversations to Change Your Child's Financial Future.  But the length of time required for the account to be open in order to qualify means “parents will want to get an early jump if they want to make themselves eligible for the potential rollover to a Roth with excess funds,” Henske says.

For more, read our reporter Pete Grieve’s story on the new 529 rule.

— Jill Cornfield, deputy editor

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