A New Tax Loophole For The Wealthy: Shifting $35,000 From 529 College Savings Plans Into Roth IRAs

The Messenger, How College Savings Plans Became a Big, Fat Tax Loophole for the Wealthy:

Tucked into the recent federal overhaul of retirement rules lies a mini tax loophole for the wealthy and their offspring. The perk, which went into effect on Jan. 1, is embedded in a surprising place: a provision intended to help millions of Americans save for the soaring cost of educating their kids.

Starting this year, families enrolled in the popular college savings plans called 529s can shift up to $35,000 in their accounts into a Roth IRA — a type of individual retirement account whose compounded growth and withdrawals are tax-free, just like those of 529s.

But while a college savings plan can be used tax-free only for educational expenses, a Roth account can be used for anything — the down payment on a house, vacations, the acquisition of a small business. And because a Roth can be invested in a much wider array of securities than a 529, it potentially has better chances of appreciating more.

As part of SECURE 2.0, the December 2022 law that’s one of the biggest changes to retirement rules in a generation, the 529 rollover provision aimed to kill two birds with one stone. First, stymie fears by savers that they could put too much money into a 529 when their child is born, then end up “overfunded” with unused balances — and hefty tax bills on withdrawals for non-educational purposes — when their child opts for a cheaper school, gets scholarship money or pursues a different path. Next, help millions of workers shore up their long-term savings. ...

But the rollover provision also created a new avenue of wealth for some higher earners by tying together America’s most popular college-funding plan — used predominantly by the wealthy — and Roths, a type of investment account aimed at the middle class but accessed by the rich through other loopholes.