You've been setting aside college money in a 529 savings plan since your kids started losing their baby teeth. In fact, you've overachieved — all the tuition bills have now been paid, and there's money left over.
Wouldn't it be nice to shift the remaining bucks to your Roth IRA retirement plan without being penalized by Uncle Sam?
A bill introduced last month in Congress aims to make that conversion decision easier — or at least less costly.
The rollover plan is the shiny centerpiece among several key features in the House bill, which is designed to make the state-sponsored 529 college savings plans more attractive.
The bill, HR 4333, is co-sponsored by Rep. Lynn Jenkins, R-Kan., and Rep. Ron Kind, D-Wis. With student loan debt at $1 trillion and rising, the proposed legislation assigned to the House Ways & Means Committee has broad implications for millions of families struggling to save for college.
"The whole goal of the legislation is to make 529 accounts easier to use and more flexible," said Betty Lochner, chair of the College Savings Plans Network, an advocacy and research organization that supports the popular 529 plans.
Named after a section of the tax law that created them, 529s have become a popular choice for saving college money because the earnings grow tax-deferred.
While the proposal includes some technical details designed to clean up current 529 regulations, the Roth rollover provision is the most innovative.
Under current laws, 529 account holders can transfer unused money from their plan to a Roth retirement account. But the money is taxed as ordinary income, and it's subject to a 10 percent penalty for not being earmarked to a qualified higher education expense.
The House proposal would allow the rollover of up to $25,000 of unused 529 money with this tax twist — the 10 percent penalty would be waived.
Joseph Hurley, an expert on 529 college savings plans, said the rollover provision is a good idea, but he doesn't like some of the mechanics. For example, the Roth conversion proposal requires college account contributions to have been made at least five years before the transfer, and the account owner must have held the 529 plan for at least 10 years.
Two other features of the House bill also should appeal to 529 investors.
One allows account owners to change their 529 investment up to four times a year from the current once-a-year limit. Many 529 investors never change their strategy after opening an account, opting to put their money in age-based funds that automatically reduce risk in stock-related investments as the child gets closer to college.
The House proposal would help those who want to respond more quickly to preserve their funds during volatile stretches in the stock market.
"We don't want people to be day-trading, but the flexibility makes sense," said Missouri Treasurer Clint Zweifel, who oversees the state's 529 program.
Another change would add computers to the list of qualified higher education expenses in all situations. Under current law, a computer purchase is not a qualified 529 expense unless the school requires that students have their own computers.
Although a 2013 bill to remove these 529 account roadblocks and others stalled last year, Lochner believes the new legislation has a better chance to succeed because the revisions are mostly technical and not costly to government tax coffers.
I wouldn't take passage for granted, but if elected officials truly are looking for solutions to reward savings and make college more affordable, this measure deserves more than passing attention.