Made Aliyah with a large 529 education plan? Here's what you need to know

Made Aliyah with a large 529 education plan? Here's what you need to know

Many U.S. citizens who move to Israel have significant savings in 529 college plans for their children. But once you're living in Israel, a critical issue often arises:

Israeli K-12 schools may or may not be eligible depending on the interpretation of the unclear laws. If you want to be conservative with legal unclarities, your options are limited. 

For postsecondary education, while some of the larger Israeli universities do qualify, such as Hebrew University, Bar Ilan, and Technion, Yeshivas and smaller private institutions do not. 

If your child does not attend an eligible university, you may be stuck with funds that cannot be used as intended.

Here are two realistic options to consider:

1. Roth IRA Rollover (Available from 2024)

Starting from 2024, the SECURE 2.0 Act allows you to roll over up to $35,000 from a 529 into a Roth IRA for the same beneficiary. This can be done tax and penalty free, subject to several conditions:

The 529 account must have been open for at least 15 years

The contributions being rolled over (and their earnings) must be at least 5 years old.

The beneficiary must have earned income in the same calendar year

The rollover amount must stay within the annual Roth IRA contribution limit (currently $7,000).

Because of the annual limit, completing the full $35,000 rollover typically takes five or more years, assuming the beneficiary earns enough each year and is not making other Roth contributions.

2. Cash Out and Pay the Penalty

If your child is not going to attend an eligible school and does not have sufficient earned income, you can withdraw the funds. In that case, you will owe:

Income tax on the earnings portion

A 10 percent federal penalty on the earnings portion

No tax or penalty on your original contributions

There are some exceptions to the penalty, such as if the beneficiary received scholarships, became disabled, or joined the military.

One important point: the funds legally belong to the account owner, not the child. 

Even though the plan was created for the child’s education, if you cash it out, you receive the funds and report the taxes on your own return.

Additional Options:

You may be able to change the beneficiary to a sibling or even to yourself if someone else in the family may still benefit. 

If your children are growing up in Israel and unlikely to attend a qualifying university, it’s worth reviewing your options now. A proactive strategy can help you avoid unnecessary taxes or lost opportunities.