A new bipartisan bill that would allow families to transfer unused 529 college savings accounts into a Roth IRA without being penalized was introduced in the Senate recently.
Senator Richard Burr (R-NC), Ranking Member of the Senate Health, Education, Labor and Pensions (HELP) Committee, and Senator Bob Casey (D-PA), Chair of the Senate HELP Subcommittee on Children and Families, introduced the College Savings Recovery Act in June.
“College savings accounts play an important role in the financial planning of families across the nation,” said Senator Burr. “We should encourage parents to save for their family’s future, while recognizing that they can’t always predict what the future holds. Their child might not decide to pursue a higher education. This legislation allows families to transfer unused or excess funds from a college savings account into a Roth IRA without being unfairly penalized. I’m proud to work with Senator Casey on this commonsense bill, which will give families greater flexibility on their savings for years to come.”
Tax-advantaged 529 accounts help families better prepare financially for the cost of sending their children to college, helping to cover costs including tuition, fees, books, and room and board.
However, under current law, families are penalized for withdrawing unused, or leftover funds, from their 529 accounts should their child decide against pursuing a higher degree, or complete their education without using all funds in the account. There is a 10% federal penalty, and the withdrawal can also be taxed.
If passed, this bill would remove the penalty and the tax if the funds are transferred to a Roth IRA.
“An early start on saving for retirement can mean the difference between peace of mind and insecurity for retired Americans,” said Senator Casey. “This bipartisan bill will allow parents to put unused savings for their children’s education into their retirement account, rather than face a penalty. I’m proud to work with Senator Burr on legislation to encourage American families to invest in their own retirement.”
A 529 account is the most popular college savings plan used by parents, according to a BestColleges analysis. Fifty-three percent of parents said they used this type of plan.
According to the College Savings Plan Network, there were just under 15.7 million open 529 accounts by the end of 2021. Total assets were over $480 billion, more than double the total assets as of 2013.
The College Savings Recovery Act was originally included as part of Senator Burr’s Boost Savings for College Act in 2017, but that bill failed to advance despite attracting bipartisan support.
It remains to be seen whether this bill could find its way into the SECURE 2.0 retirement reform package currently under consideration in the Senate, advances independently, or stalls in the 117th U.S. Congress.
SEE ALSO:
• 529 Plans Still Have an Identity Problem
• SECURE Act Allows 529 Plans to Repay (Some) Student Loan Debt
• Betterment Launches Student Loan Management Tool, Enters 529 Space
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
