new Roth IRA conversion option for unused money in 529 college savings plans , which went into effect this year , is likely to spur more college savings , according to a new survey from Saving For College , a data tracker and advocacy group that ’ s part of Backer , a fintech provider .

“ Leftover funds in 529 accounts were not a big problem ,” says Martha Kortiak Mert , Saving for College ’ s chief operating officer . “ However , the concern that 529 funds would not be used has been a major psychological barrier for many parents who prefer to use a taxable account to save for college because of the perceived flexibility .”

The 529 account allows parents to save money tax-free for their children or grandchildren ’ s educational expenses . They ’ re funded with after-tax dollars , and the funds can grow tax-free . Qualified withdrawals are free from federal income taxes .

But this is the first year that extra money in the account can be rolled over to an account beneficiary ’ s Roth IRA without incurring federal taxes or penalties , though strict rules apply .

Of those surveyed , 76 % of respondents who don ’ t yet have a 529 plan said that the option of converting leftover money to a Roth IRA makes them “ much more likely ” or “ somewhat more likely ” to open a 529 plan . Of those who already own a 529 , 72 % said they were aware of this new option , and 57 % said that the new option makes them more likely to increase their contributions to their 529 plans .

Uncertainty about how contributions will be used if the beneficiary doesn ’ t attend college or doesn ’ t need all the money saved in the 529 plan has stopped some parents from saving more or using 529 plans altogether , according to the survey . “ Expanding the definition of qualified expenses to include Roth

IRA transfers breaks down a common barrier to opening a 529 account in the first place ,” says Mert . The new Roth-transfer option is “ poised to drive growth in 529 plan usage .” Nationwide , there were more than 16 million 529 accounts in the first quarter of this year , with aggregate assets of nearly $ 500 billion , according to Saving for College . Other factors — besides the potential to roll

“ Expanding the definition of qualified expenses to include Roth IRA transfers breaks down a common barrier to opening a 529 account in the first place .”

— Martha Kortiak Mert

over unused funds to a Roth IRA — actually rank higher in influencing the decision to open a 529 account , the group said . Eightysix percent of respondents said that “ financial security for a child ’ s education ” ranked as the top reason for opening an account . Sixty-nine percent of respondents cited the tax advantages . Only 23 % indicated that the “ ability to roll over funds into a Roth IRA ” was their primary reason for opening a 529 .

Account owners may not realize all the options they have available for leftover account funds , including their ability to switch beneficiaries and name another child or grandchild , the survey found . Just 59 % of account holders surveyed said they feel only “ somewhat knowledgeable ” about plan benefits . The survey found that as many as 81 % of the respondents who didn ’ t have a 529 said they did not know the plans could be used to pay off student loans of up to $ 10,000 per beneficiary . Among the account holders surveyed , that number rose to 58 %.

“ The survey highlights the importance of continued education and outreach ,” Saving for College said .

The survey also highlighted reasons that some parents and grandparents are reluctant to open a 529 plan . Of those who do not yet have a 529 plan , 32 % of those surveyed said that “ fees and expenses ” were a concern and 26 % cited worry about “ investment risks .” Another 25 % said their resistance was due to “ uncertainty ” about being able to “ save enough to make it worthwhile .”

The survey of 1,133 people was conducted online from June 28 to July 10 . Sixty percent of respondents were parents interested in saving for their child ’ s education , while 32 % were grandparents interested in saving for a grandchild ’ s education .

— Ben Mattlin

DECEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 11