Should you worry about overfunding your 529 plan?

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529 Education Savings Plans are powerful tools to help pay for the rising costs of education. Still, some people hesitate to use them.

A common concern is excessive savings. You can use 529 funds to cover only qualified education expenses without incurring a tax penalty, but it can be hard to determine how much money you really need.

Many parents open 529s for their children at the time of their birth, when there is no way to know whether their children will earn scholarships or go to college. Fortunately, parents with multiple children can change the beneficiary of a 529 plan.

But what do you do if you still have money left over after covering education expenses?

Thanks to the SECURE 2.0 Act, you can now transfer unused 529 funds to a Roth IRA. But 529 rollovers aren’t a way to save extra for retirement; Rules limit conversions.

These are the things you should consider when converting 529 funds to a Roth IRA.

What are the rules for converting a 529 plan to a Roth IRA?

The recipient of the funds must be in the name of the Roth IRA 529 plan beneficiary.

A 529 plan must be open for at least 15 years.

You can’t convert 529 contributions (or the earnings on those contributions) made within the last five years.

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The 529 funds you roll over count toward your IRA annual contribution limit.

You can transfer a maximum of $35,000 from a 529 plan to a Roth IRA over your lifetime.

529 funds must be converted by paying the amount directly into a Roth IRA – you cannot make the payment yourself and then deposit the money into a Roth IRA later.

You can contribute to a Roth IRA only if you have income from your job, so the 529 beneficiary must have qualifying income when the 529-to-IRA conversion occurs.

Roth IRA income limits do not apply to 529 rollovers.

While avoiding Roth IRA income limits is a retirement-savings benefit for people with higher incomes, the remaining rules for rolling over additional 529 funds are designed to ensure that people use 529 plans for education as intended. Annual contribution limits and lifetime limits on conversion mean you can’t double your retirement fund.

So, what’s the final point?

The ability to convert unused 529 funds to a Roth IRA can alleviate potential concerns about saving excessively for education. Still, don’t rely on your 529 as a means of saving for retirement. Instead, consider funding your Roth IRA separately.

529 Rollover into ABLE Accounts

Family Those with a disabled child can transfer their 529 account to an ABLE account, which is a tax-friendly way to save for the disabled person’s needs while maintaining eligibility for government assistance. It uses the same legal framework as 529 plans, and it works the same way. Contributions are made with after-tax dollars into a plan with a set menu of investment options. The income is compounded tax-free, and withdrawals to pay for qualified expenses are also tax-free.

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You can transfer funds from a 529 plan to an ABLE account up to the $19,000 ABLE annual contribution limit without a tax penalty. An ABLE account must have a named beneficiary, just like a 529.

Eligibility for an ABLE account is limited to individuals with significant disabilities that began before age 46. ABLE accounts cover a broad set of eligible expenses, including education, housing, health care, employment training and assistance, and legal fees.

The needs and circumstances of individuals change throughout their lifetime, often in ways we cannot predict. ABLE account rollovers provide additional flexibility to families if a 529 account beneficiary is diagnosed with a disability or becomes disabled due to an accident or injury.

This article was provided to The Associated Press morningstarFor more personal finance content, visit https://www,morningstar,com/personal-finance,

Margaret Giles is the senior editor of content development for Morningstar.