Chapters

00:00 Intro to 529 Education Savings Programs in Retirement

00:31 529 Plan Types: Education Savings Plan (MACS) vs Prepaid Tuition Plan (MPACT)

01:31 4 Major 529 Plan Options at/in Retirement

01:59 Option 1: Leave Funds in the 529 Plan (and pass to heirs)

03:26 Option 2: Take Qualified Distributions from 529 Plan

05:08 Option 3: Take Non-qualified Distributions from 529 Plan

06:38 Option 4: Rollover 529 Plan to Roth IRA for Beneficiary

08:32 Case Study 1: Taking Non-qualified Distributions to Supplement Early Retirement Income

10:30 Case Study 2: Taking Qualified Distributions to Fund College Expenses and Pass Remainder to Heirs

11:41 Case Study 3: Rollover Portion of 529 Plan to Roth IRA for Child Beneficiary

13:29 Action Items for PERS Retirees with 529 Plans

14:19 Preview of Next Video and Outro

15:33 Legal Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, financial planning firm owner, and host of the PERS Pro YouTube channel. If your children graduated from college and you still have money left over in a 529 account, then today's video is for you. We are breaking down the options you have with those 529 accounts and how those options could impact your Mississippi retirement. Let's get started.

As you enter retirement, evaluating what to do with a 529 college savings plan applies whether the account is held in your name or your spouse's name. Whether you funded the account years ago for your spouse, children, or even grandchildren, Mississippi PERS retirees must first recognize the difference between the two primary types of 529 programs available in Mississippi. 

You have the Education Savings Plan, such as the Mississippi Affordable College Savings or MACS program, and prepaid tuition plans such as the Mississippi Prepaid Affordable College Tuition or MPACT program. Education savings plans, like MACS, function as investment accounts where growth depends on underlying investment performance. Prepaid tuition plans, like MPACT, are guaranteed by the state of Mississippi to lock in future undergraduate tuition rates and mandatory fees. 

Regardless of which type of 529 plan you hold, a PERS retiree has four primary options upon reaching retirement.  Option one keeps the account active to build tax-deferred multi-generational wealth. Option two uses qualified withdrawals to use tax-free growth to fund education expenses. Option three liquidates 529 funds for personal living expenses, accepting the income taxes and penalties on growth. And option four rolls over unused 529 funds into a Roth IRA through very strict requirements.

Let's look closely at option one: keeping your 529 account intact, allowing earnings to grow and passing the account balance to future generations. 

Under IRS Publication 970 and Internal Revenue Code Section 529, education savings plans, like MACS have no required minimum distributions and no expiration dates, allowing account owners to name successor owners to manage the funds indefinitely across generations. Conversely, prepaid tuition plans, like MPACT, carry strict contract expiration rules, typically requiring benefits to be used within eight to ten years of the beneficiary's projected college enrollment date, and a named successor assumes the contract ownership. 

The main benefit of leaving funds in a 529 plan is the tax deferred growth across generations and exclusion from estate taxes.  On the downside, unlike taxable brokerage accounts, which we discussed in video number 67, 529 plan earnings growth do not receive a step-up in basis at death, and MPACT prepaid contracts face strict expiration deadlines. 

Looking at the tax impact of leaving funds in a 529, both the IRS and the Mississippi Department of Revenue grant complete tax exemption on internal investment growth and prepaid contract appreciation as long as funds remain in the 529 accounts.

Now let's analyze option two taking qualified distributions or changing the account beneficiary to another eligible family member. 

Under IRS Publication 970 and IRS Notice 2018-58, qualified distributions from MACs plans can cover college tuition, fees, required equipment, room and board, up to $10,000 annually for K-12 tuition and up to $10,000 lifetime for student loan repayments. MPACT contracts pay full undergraduate tuition and mandatory fees directly to enrolled institutions. 

Under Internal Revenue Code Section 529, you can change the beneficiary without tax or penalty to any eligible member of the family, including but not limited to grandchildren, nieces, nephews, siblings, or even yourself as a PERS retiree pursuing continuing education. 

The biggest benefits of taking qualified distributions from a 529 plan are the 100% tax-free distributions of earnings growth and the ability to change beneficiaries and shift funds allocated between family members seamlessly. The primary drawbacks are strict calendar year matching rules required by the IRS and MPACT restriction to guaranteeing in-state public undergraduate tuition and fees only, although you can use the funds for in-state, private, out of state, or graduate tuition based on a contract formula. 

Looking at the tax impact of taking qualified distributions from a 529 plan, neither the Internal Revenue Service nor the Mississippi Department of Revenue levies income tax or penalties on either savings or prepaid tuition plans.

Let's examine option three: liquidating 529 funds for non-qualified personal expenses to supplement your retirement cash flow.

Under IRS Publication 970 and Form 1099 Q guidelines, non-qualified 529 distributions are treated as a pro-rata combination of principal basis and investment earnings. The principal portion is always tax-free. However, the earnings portion is included in federal gross income as ordinary income and penalized with a 10% federal penalty. In Mississippi, the Department of Revenue taxes the earnings portion and enforces tax deduction recapture on any previous state income tax deductions claimed for MACS or MPACT contributions. 

The main benefits of taking non-qualified distributions from a 529 account are immediate retirement liquidity plus federal income tax-free return of your original contributions. The main drawbacks are the federal ordinary income tax on earnings, plus 10% IRS penalty, plus Mississippi State Income Tax recapture of prior deduction of contributions.

Looking at the tax impact of taking non-qualified distributions from a 529, the account owner will pay federal ordinary income taxes on the earnings plus a 10% penalty on the earnings, and the account owner will pay Mississippi income tax on the earnings plus income taxes on any prior state deduction taken for 529 contributions.

Let's examine option four: rolling unused 529 assets directly into a Roth IRA for the account beneficiary.  The circumstances required will make this option out of reach for most watching this video, but I'm going to cover the requirements anyway. 

Enacted under Secure 2.0 Act, Internal Revenue Code Section 529 permits direct trustee to trustee rollovers from a 529 plan to a Roth IRA plan, tax-free and penalty-free. The 529 account must have been open for at least 15 years.  Funds contributed and their associated earnings within the last five years cannot be moved. The Roth IRA must be owned by the 529 beneficiary. The beneficiary must have earned income matching the rollover amount, and transfers are capped at $7,500 annually for 2026 up to a $35,000 lifetime limit per beneficiary. 

The major benefit of rolling over $529 funds into a Roth IRA is the ability to convert excess 529 tax-deferred funds into tax-free retirement assets for your children or grandchildren. The main downside is navigating the strict account age and annual contribution rules, which makes this unattainable for most. 

Looking at the tax impact of rolling over 529 funds into a Roth IRA, direct trustee-to-trustee rollovers incur zero federal income tax, no 10% IRS penalty, and zero Mississippi State income taxes or prior tax deduction recapture. It's important to note that MPACT program description rules, regulations, and procedures document does not mention Roth IRA rollovers as a qualified rollover distribution in Chapter 14 rollovers as of the video recording.

Let's evaluate our first hypothetical example. An early PERS retiree liquidating her 529 account via non-qualified distributions to supplement early retirement income. 

Ashley is a 48-year-old single retiree who earned $125,000 before retiring with a $55,000 PERS pension. She liquidates $10,000 annually from her $40,000 max $529 balance over four years. Each $10,000 withdrawal contains $6,250 of tax-free principal basis and $3,750 of taxable earnings. Because she uses the money for living expenses, the $3,750 earnings portion is subject to ordinary federal income tax plus the 10% IRS penalty. 

Focusing strictly on the additional tax burden caused by the non-qualified 529 distribution, Ashley's $3,750 of taxable earnings puts her into 12% marginal federal tax bracket generating $450 in additional federal income taxes. The 10% penalty adds another $375, bringing her total additional federal tax liability due to the non-qualified distribution to $825. 

In Mississippi, her state exemptions fully absorb the $3,750 in additional state adjusted gross income, resulting in no additional Mississippi state income tax. However, Ashley may have to report prior state income tax deductions on 529 contributions as taxable income. Furthermore, adding $3,750 to her federal modified adjusted gross income keeps Ashley below the 400% federal poverty level, preserving her Affordable Care Act Marketplace Health Insurance Subsidies, but lowering the subsidy she will receive.

Our second case study evaluates a married high-income PERS couple using part of their 529 balance for qualified college education expenses and preserving the rest for their heirs. 

Mark, age 68, and Susan, age 66, earned $500,000 prior to retirement. Mark retired with a $120,000 PERS pension. They hold a $100,000 max $529 account. They withdraw $20,000 in the first year of retirement to pay qualified tuition for their oldest grandchild and preserve the remaining $80,000 to pass to the remaining grandchildren upon their death.

Examining the incremental impact for Mark and Susan taking a $20,000 qualified 529 distribution generates zero dollars in additional federal income tax, zero dollars in IRS penalties, and zero dollars in additional Mississippi State income tax. 

Because qualified distributions do not increase federal modified and adjusted gross income or provisional income, this transaction has no impact on their future Medicare, IRMA, surcharges, or Social Security taxation.

In our final case study, we evaluate a widowed PERS retiree executing a tax-free rollover from a 529 plan into a Roth IRA for her only child. 

Diane is a 67-year-old widow earning $210,000 annually from her PERS pension and Social Security Survivor benefits.  She holds a $80,000 MACS $529 account opened 18 years ago. Under secure 2.0 rules, she executes direct trustee-to-trustee rollovers, totaling $35,000 over a period of five years into a Roth IRA owned by her child who herself has earned income, leaving $45,000 in the 529 plan for future education expenses of her grandchildren.

Diane is currently enrolled in Medicare and while drawing Social Security Survivor benefits now, will convert to her own retirement Social Security benefits at age 70. 

Looking at the additional tax impact for Diane, executing a 529 to Roth IRA rollover triggers $0 additional federal income tax, $0 IRS penalties, and $0 additional Mississippi State income tax. Because the rollover moves directly trustee to trustee without increasing her adjusted gross income, it causes $0 increase in her Medicare IRMA surcharges and $0 increases in Social Security benefit taxation. 

One thing to note with this scenario, though, is that Diane's child receiving the Roth IRA rollover as the 529 beneficiary cannot herself also contribute to a Roth IRA in the tax years she receives each rollover. But the upside is that the normal income limitations that apply to Roth IRA contributions would not apply to Diane's child.

If you or your spouse hold a 529 plan and are nearing or in PERS retirement, here are your action items for today. 

One, audit account type and beneficiaries. Review whether your 529 account is a MACS or MPACT account. Verify the primary and successor owner designations, and check current beneficiary assignments. 

Two, estimate future qualified expenses.  Use online calculators to estimate what future education expenses might qualify as qualified distributions from a 529 to determine what excess funds might be available to pass the heirs, take non-qualified distributions, or rollover to a Roth IRA. 

Three, evaluate secure two point zero rollover eligibility. Check if your 529 plan meets the holding requirements and whether your beneficiary meets the earnings requirements.

I hope this video helps Mississippi PERS members navigate their options in retirement when evaluating what to do with a 529 account. This is the last video in our retirement series for 2026. 

In our next video, we will start our new series focusing on late career PERS members by answering the question: How will working one more year impact my future PERS and Social Security retirement income? Please make sure you subscribe so you don't miss this and other videos in our new late career series.

If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members. And finally, if you are looking for a financial planner who specializes in helping PERS members plan for retirement, including building tax-efficient retirement plans utilizing college savings accounts, please visit our website at perspro.ms to learn more about how we help PERS members like you. 

Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Disclaimer: This video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.