I funded a 529 plan with myself as beneficiary in the expectation of starting a second career in retirement. 

My 529 is invested in TIPS as part of my bond allocation. 

Due to a variety of factors, my plans for a second career are in doubt, and the current value of the 529 fund exceeds my anticipated education expenses.

I anticipate that significant withdrawals from the 529 plan will be nonqualifed and the earnings portion of those withdrawals (approx $10,000) will entail tax penalties of 10% from the feds and 2.5% for California state income tax beyond the tax as income.

I do NOT have children who could become beneficiaries.  My sole nephew is unlikely to have further education expenses.

I would like this Forum's input:  Does it make sense to liquidate the 529 and pay the penalties now to avoid further overfunding?  If I liquidate, I'd want to put the funds into IBonds to maintain my bond allocation but total value is greater than the annual limit for IBond purchases.  Can I roll it over to a Roth IRA although I am already in retirement.  I realize I need to get advice from a tax advisor, but I am wondering how others may have dealt with this situation.  Any comments are appreciated.

I am not an expert in tax laws, but I read here

http://www.allbusiness.com/government/business-regulations/307306-1.html

that if you are considering making a nonqualified withdrawal and your money is in a 529 plan with a state with a penalty, you should consider rolling it over to a 529 plan in a state without a penalty.  I am not sure how that would work, but it is something to research further.

This link may be helpful, too

http://www.epricefinancial.com/FinArt91.htm

Can I roll it over to a Roth IRA although I am already in retirement. 

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What are you asking here?  Are you asking can you take a non-qualified distribution from your 529, pay the taxes/penalties and then use what is left to fund a Roth IRA even though you have no earned income this year?

 It seems what you are concerned with is the tax and penalty on the growth of current investments.

Yes, if you withdraw $$ from the 529 plan for purposes other than qualified educational expenses, then the earnings portion of the withdrawal will be subject to a 10% penalty and will be includable as ordinary income. It also sounds like CA will impose their own penalty for non-qualified withdrawals. But remember, the penalty and tax only occurs on the earnings, not the after tax contributions....and all withdrawals from 529 plans, like traditional IRA's, comes out prorated between earnings and contributions.

If you are certain you will not be using the 529 assets for qualified educational expenses, than it would be advisable to withdraw them sooner than later, as all future earnings are going to be reduced by 12.5% before tax.

No, you may not convert your 529 plan to an IRA. One is an educational savings plan, one is a retirement plan.

The above idea of transferring your CA 529 plan to another state without the state penalty, before making a withdrawal, should be investigated carefully....as the CA 529 plan may have provisions dealing with this....and the cost of the transfer may exceed the 2.5% penalty on the earnings.

BruceM

Yes, what I am asking is whether I could take a non-qualified distribution from the 529, pay the taxes and penalties and then invest the balance in a Roth IRA even though I have no income from employment this year (so far).

I don't think switching to 529 plan from another state would provide any benefit.  Any tax due to the state of California occur because I live in California; my current 529 plan is offered through Nevada.

The links posted above were helpful.  It does make sense to move funds out of the 529 as soon as possible to avoid further penalties on earnings. 

I am not working now so my marginal tax rate is low. However I would like to get any tax advantage that is available, so I am looking for a place to park the funds which will allow tax deferral of earnings.

One possibility is investment in IBonds but I understand that there is a annual $5000 purchase limit per social security number.  Since taxes will be paid on unqualified distributions, I do not understand why I could not deposit the funds into my Roth IRA except that I have no employment income for the year (as yet).

I hope this clarifies my questions. I appreciate the thoughtful input.

I don't think switching to 529 plan from another state would provide any benefit.  Any tax due to the state of California occur because I live in California; my current 529 plan is offered through Nevada.

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I did a quick search on that and it looks like you are right about that unfortunately.  Can you move, lol?  I used to live in California and moving out of that tax-hell state was one of the best ideas I ever had. 

Yes, what I am asking is whether I could take a non-qualified distribution from the 529, pay the taxes and penalties and then invest the balance in a Roth IRA even though I have no income from employment this year (so far).

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I am pretty sure the answer to this is no if you have no earned income but I am not a tax expert so check with a tax attorney to make sure.  I think if you have earned income under a certain amount, you can contribute up to a certain amount as long as you have earned income of at least that amount or you can convert a traditional IRA to a Roth as long as you don't have a total income beyond a certain amount.  I can't remember what the amounts are but I am sure a quick internet search would tell you the numbers.

Regardless of the amounts, I think you either need to be converting a traditional IRA to a Roth or have earned income to contribute to a Roth.  One solution here is to get a part time job to have earned income so that you can contribute at least part of it to the Roth.

It is too bad that I did not realize the 529 was overfunded while I was working; however, I still had big ambitions then for a second career. 

I will look up the contribution limits and income requirements to see if part-time employment makes sense. A part-time gig at Peet's Coffee might be fun. 

I understand why some leave the Golden State, but I am a native and all my roots are here.  I keep my earthquake box stocked and hope for the best. 

Thanks for all the input,

Cheryl

It is too bad that I did not realize the 529 was overfunded while I was working; however, I still had big ambitions then for a second career. 

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One of the other best ideas I have ever had was to go back to school to change careers.  My life has been enhanced because of this decision in ways I never imagined.  Yes, it was hard to go back to living like a student once I had been in the working world, but it was a small price to pay for the benefits (not all of which were monetary) I received in the long run.

Good luck to you whatever you choose to do and I hope you never need your earthquake supplies!