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From College to Retirement: The $35,000 Transition You Need to Know

College student on campus

Let's talk about money, education, and retirement. You might have heard of something called a 529 plan. It's like a special savings account that can be helpful for families who want to save for their kids' education. These accounts let you grow your savings without paying taxes on the earnings, but there are some rules.

The rules can be tricky, and they depend on where you live. Some states give you extra tax benefits if you use a 529 plan. So, if you're in one of those states, you get more rewards for saving money.

Now, here's the thing. 529 plans usually have limits on what you can use the money for. It's mainly for college, private school, or student loans. There are penalties if you take the money out for something else, like a vacation. You might have to pay 10% of what you earned in taxes, plus some federal taxes.

Happy retirees

But in comes the Secure Act 2.0. It's like a new set of rules that make 529 plans even more interesting. Starting in 2024, you can move up to $35,000 from your 529 plan to something called an Individual Retirement Account, or IRA. It's a way to save money for when you retire.

This new law is fantastic. But be warned that there are rules you need to follow, and it's not something you can do in a hurry. You have to wait for 15 years from when you opened the 529 plan before you can move the money to an IRA. And remember, there are limits on how much money you can put into an IRA each year.

The important thing to know is that the money you move to the IRA goes to the person you were saving for, like your child. It's not for you, the person who owns the account.

And here's another thing to keep in mind. 529 plan rules differ in each state, and not all states might agree with these new rules immediately. Some states might make you pay taxes if you move money from a 529 plan to an IRA. It's a good idea to check what your state says.

Now, who benefits the most from this? If you were worried that your child or grandchild might not go to college, this can be an excellent way to use the money for their retirement instead. But not everyone will benefit from this. You need to ensure the person you were saving for won't use the money for education. It might be better to change who the account is for if you have other family members who need it for education.

So, starting in 2024, you can transfer up to $35,000 from your 529 savings plan to an IRA for the person the plan is for. Remember, you must have had the 529 plan for at least 15 years to do this. It's a great alternative way to save for retirement, especially if the money is no longer needed for education expenses.

Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial, tax, or legal advice. The details regarding the Secure Act 2.0, 529 plans, and IRAs may change over time and can vary depending on your individual circumstances and the state you reside in. It is advisable to consult with a qualified financial advisor or tax professional before making any decisions related to your 529 plan or IRA. Any actions you take based on the information presented in this article are at your own risk.


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