529 Plans, tax-free investment programs for college savers, have been augmented by over a dozen articles of federal legislation since their introduction in 1996, improving tax benefits, qualified expenses, payment of student loans, and more. They’re not perfect, however. A common complaint is what families might do with money leftover should the beneficiary get a full ride or not attend college. Withdrawing leftover funds would subject the account owner to both tax on earnings plus a 10% penalty tax as a nonqualified withdrawal. The latest bill, S. 4400 or the “College Savings Recovery Act,” would mitigate that penalty by allowing assets to be rolled into a Roth IRA.

How The College Savings Recovery Act Works

In June, the bill was introduced by Senators Richard Burr (R-NC), and Bob Casey (D-PA), who have worked together on prior bills improving 529 programs. Americans held over 15.7 million accounts at the end of 2021, according to the CSPN (College Savings Plans Network).

If S.4400 is enacted, account owners would be able to make a direct rollover into a Roth IRA for either themselves or their beneficiary. There are some limitations to the benefit, however. It would require that:

  • The account must have been opened at least ten years prior to initiating a rollover
  • The rollover must not exceed the annual Roth IRA contribution limit for the recipient
  • The rollover must not exceed the balance of the plan five years prior to the distribution

These limitations are intended to prevent abuse of the benefit as a tax shelter. 529 plans have high contribution limits in some states, typically on the order of several hundred thousand dollars. Allowing larger rollovers might result in wealthy contributors using the plans to shift money in for the sole purpose of avoiding taxes, rather than their intended benefit of saving for education.

Getting Americans To Save Is Hard

Americans have access not only to a wide variety of alternative investment options, but little leftover after putting money into debt, the mortgage, utilities, food, clothing, kid activities, car payments, retirement payments, medical costs, and a thousand other demands on their limited financial resources, especially young families who need to save most. A Bankrate study earlier this year found over 56% of Americans couldn’t cover an unexpected $1,000 expense.

Queue the 529 plan, which – on top of federal and state tax-free withdrawals – receives tax benefits for contributions in over 30 states, preferred treatment when considered in the FAFSA formula, no expiration, and can be used at a wide variety of K-12 schools, colleges, apprenticeship programs, and more. Plus, they’re pretty straightforward as far as investments go: Open plan, pick an investment option from the menu, and you’re off to the races. 529s are as easy as it gets for the average family to save for future college expenses.

The downside is that the funds are locked in the plan, meaning you cannot withdraw for most financial hardships such as divorce, job loss, or a death other than the beneficiary, without paying a tax penalty. As a result, some families object because they fear their beneficiary may not attend college or that they might get financial aid that renders the 529 redundant. The College Savings Recovery Act helps alleviate that concern.

Will The Bill Pass?

Like most standalone bills, S.4400 will not be passed on its own. To become enacted, it would need to be adopted in a larger legislative initiative. For example, the ABLE Financial Planning Act was introduced in 2017 as a standalone bill to allow 529 plan assets to be rolled into 529 plans. Later that year the language was included in the larger Tax Cuts & Jobs Act. S.4400 could get rolled into the current frontrunning larger piece of legislation titled, “Secure Act 2.0.” That legislation is popular, has bipartisan support, and there’s a good chance we could see a small benefit to 529 plans included as another incentive for Americans to save for higher education. If enacted, Americans who qualify could begin making rollovers into Roth IRAs after December 31, 2022.


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