529 Account to Roth IRA?

Take-Away: A bill has been filed in Congress to allow a penalty-free rollover of unused IRC 529 plan balances into a Roth IRA.

Background: The bill, called the College Savings Recovery Act, would allow for special rollovers to Roth IRAs from long-term qualified tuition programs without any penalty. The bill has bipartisan sponsors [ Richard Burr, R- NC and Bob Casey, D-PA.] This proposal is pretty much the same that Senator Burr proposed back in 2017 (which did not get much traction.) over 30 states offer their own deductions and creditors for the use of their higher education plans.

Impact: Under current law, parents are penalized for the withdrawal of unused or ‘leftover’ funds from their 529 account, should their child decide against pursuing a higher degree or complete their education without using all of the  funds held in the 529 account. Those withdrawals not used for qualified higher education expenses (tuition, fees, books, room and board) would then be subject to income tax as ordinary income and also be subject to a 10% penalty on the account earnings. Therefore, if the bill became law, parents would be allowed to put those ‘unused savings’ for their children’s education into their own retirement account, rather than face a penalty and taxes.

Conclusion: As noted, this is only a proposed bill, and 5 years ago it did not receive much interest in Congress. Yet Congressional desire to encourage more Roth IRAs is apparent in the proposed SECURE Act 2.0. It will be interesting to see if this bill is somehow integrated into the SECURE Act 2.0 which seems likely that Congress will pass later in 2022.