DeKALB – Earlier this month, an Illinois bill was signed to allow unused college savings to be utilized for retirement.
With this plan, parents are able to roll over their leftover Illinois 529 college funds (Bright Start and Bright Directions) into a Roth IRA, according to a recent Illinois e-news release.
A Roth IRA – individual retirement account – uses the money someone puts into the account for investments. Over time, the investments put in can earn a return and grow the amount tax-free. One can withdraw the money tax-free in retirement, according to NerdWallet.
“This will give parents another option when deciding what to do with the money they’ve saved for their children if they don’t use all of it,” said Michael Frerichs, Illinois State Treasurer. “A common question we get from parents is what they can do with their Illinois 529 money if their child doesn’t go to college or gets a scholarship, and there is money left over in the account, and we have good news to share with them.”
This plan was made possible through Congress approving a measure in December 2022 to change Section 529 of the Internal Revenue Code to authorize tax and penalty-free rollovers of college fund plans to Roth IRAs, with limitations, according to a recent Illinois e-news release.
The measure was put into effect on Jan. 1st.
There are limitations to this plan, including a $35,000 lifetime limit on transfers, subject to annual Roth IRA contribution limits. This year, the Roth IRA contribution limits are $7,000 for people under 50, according to the e-news release.
This plan was created and put into effect on Aug. 2.
“We are pleased to be able to tell families who are responsibly saving for their children’s future education that any unused funds can now be used to help start saving for their child’s retirement without penalty,” State Rep. Diane Blair-Sherlock said.
In addition, rollovers must be made to the college savings account beneficiary, not the owner. The rollovers also can only be made to 529 accounts that have been active for 15 years, and have had no contributions or investment earnings in the last 5 years, according to the e-news release.
The state law already allows parents to have money left behind in a Bright Start account for future use by another family member or to roll over the money into an Illinois ABLE account. The money can also be taken out as a non-qualified withdrawal, however, there are tax implications, according to the e-news release.
“We worked together to approve this common-sense change that will help families who open college savings accounts for their children,” State Sen. Steve Stadelman said.
