How to Turn Education Planning Into Retirement Planning

Anyone determined to help pay for a child’s or grandchild’s education needs to start saving as early as possible, considering how the cost of college continues to skyrocket.

Fortunately, there are ample ways to do so. One of the most popular is a 529 plan, which allows the money placed in the plan to grow tax-free. Withdrawals are also tax-free when used to pay for qualified education expenses, such as tuition, books and room and board.

But as advantageous as 529 plans can be, people sometimes are hesitant to invest in one. After all, this is money dedicated for a specific purpose, a purpose that is often nearly two decades in the future and somewhat uncertain. Plans can change over the course of those years.

What if the child or grandchild chooses not to attend college? What if they earn a scholarship that pays for most or all of their education, leaving an unused balance in the 529? What happens to the money then?

A Roth alternative

At one time, the options were limited. The beneficiary named on the account could use the money for future education expenses that qualified.

For example, if even further into the future they changed their mind and elected to attend college after all, the 529 money would still be there and could be used at that time. Or if they pursued a master’s degree, they could use the money they didn’t need for a bachelor’s.

If future education expenses weren’t on the cards, the beneficiary could access the money –– but at a significant cost. They would have to pay income taxes plus a 10% penalty on any money they withdrew from the account.

Fortunately, as of last year, there are now other alternatives because of the federal SECURE 2.0 Act. One of the new options is to roll over the money into a Roth IRA. The beneficiary can do this without paying any taxes or penalties.

The money then grows tax-free, and when the beneficiary is at least 59½ years old, they can withdraw the money without paying taxes at that time.

This does come with stipulations:

• The 529 must have been opened at least 15 years prior to the transfer to a Roth.
• The Roth must be in the name of the beneficiary designated in the 529 account.
• You can transfer up to $35,000 from the 529 into the Roth, but that entire amount cannot be moved over in one fell swoop. The annual limit to contribute to the Roth is $7,000, so if you did have a full $35,000 to transfer, you would need to do it in $7,000 increments over five years.

What works best for you?

Suddenly, the money set aside for a college education can instead become the start of retirement savings for the young person.

And for some grandparents, creating a 529 plan for a grandchild not only can help that child pay for education expenses, but also can help with the grandparents’ tax planning.

As an example: In Washington state, where I live, there is an estate tax on estates worth more than $2.2 million. One strategy to reduce the amount of the estate tax is to gift money to grandchildren in the form of a 529 plan.

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Under 2025 tax regulations, you are allowed to gift as much as $19,000 a year to someone, and a married couple can donate double that amount –– $38,000.

The grandchild receives an investment in their future, and the grandparents may be able to worry a little less about the taxes that could come out of what they leave to their heirs.

Perhaps you would have been reluctant to open a 529 account in the past. But with the changes brought about by the SECURE 2.0 Act, the 529 might be more appealing to you.

But whether it’s the right answer for you also depends on your individual goals, needs and circumstances. Your financial professional can help you sort through the pros and cons of a 529 and make recommendations about what might be the best decision.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Investment advisory services and insurance services are provided through The Retirement Solution LLC, a Registered Investment Advisor.

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