Frerichs' Plan to Allow Leftover College Savings Funds to Be Used For Retirement Signed Into Law
Parents who don’t use all the money in their Illinois 529 College Savings Accounts (Bright Start and Bright Directions) are now able to roll over the funds into a Roth IRA under Illinois Treasurer Michael Frerichs’ plan that was signed into law.
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“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 Treasurer Frerichs, who thanked Gov. JB Pritzker for signing the legislation and State Sen. Steve Stadelman and State Rep. Diane Blair-Sherlock for sponsoring it. “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.”
The option is possible because Congress approved a measure in December 2022 changing Section 529 of the Internal Revenue Code to authorize tax- and penalty-free rollovers from college savings plans to Roth IRAs, with some limitations. The measure took effect on January 1, 2024.
To take effect in Illinois, however, lawmakers needed to change state law to allow the Roth IRA rollover option for Bright Start and Bright Directions 529 college savings account owners.
“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,” said Blair-Sherlock of Villa Park.
“We worked together to approve this common-sense change that will help families who open college savings accounts for their children,” said Stadelman, whose district includes Rockford.
State law already allows parents to leave leftover money in a Bright Start account for future use by another family member going to college or roll over the money into an Illinois ABLE account. The money also can be taken out as a nonqualified withdrawal, but there are tax implications, and people are encouraged to consult a tax professional.
The federal law set some limitations on college savings rollovers, including a $35,000 lifetime limit on transfers, which also are subject to annual Roth IRA contribution limits (this year they are $7,000 for people under 50). In addition, rollovers must be made to the college savings account beneficiary and not the owner. And rollovers only can be made from 529 accounts that have been active for 15 years and no contributions or investment earnings in the last five years are eligible for rollover.
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