Under a new law known as the SECURE Act 2.0, starting in 2024 you can convert any unused 529 assets to Roth IRAs belonging to beneficiaries without incurring income taxes or 10% penalties on earnings – although certain restrictions apply.
For a rollover to take effect, an IRA must be in the beneficiary’s name, with recent 529 contributions unsuitable for transfer. Furthermore, earned income must exist for rollover to occur.
What is a 529 plan?
A 529 plan is a tax-advantaged investment account designed to help save for education costs of any sort, with federally tax-deductible contributions and deferred growth, tax-free distributions if used towards qualified expenses, and no federal withholding tax to worry about when withdrawing earnings for qualified expenses.
Tuition expenses at both in-state and out-of-state public, private and religious institutions as well as certain graduate programs qualify, while certain vocational schools, apprenticeship programs and student loan repayments also may.
State managed accounts typically offer a selection of mutual funds that meet various investment goals, along with potential additional benefits like matching grants or scholarships, tax deductions, protection from creditors and exemption from financial aid calculations. Beneficiaries can be changed at any time without incurring penalties; withdrawals that do not meet qualified education expenses will incur income taxes as well as an additional 10% federal penalty tax.
How can I roll my 529 plan into a Roth IRA?
Direct 529 to Roth IRA rollover allows you to move funds directly from plan accounts into tax-free retirement savings vehicles that can then be used for qualified education expenses. However, this requires careful planning as the process isn’t simple.
One major decision you’ll face when investing is how and where to place the funds. A 529 account offers limited investment choices; in contrast, Roth IRAs allow more freedom of choice.
As part of your new Roth IRA rollover, any amount transferred cannot exceed contributions and earnings made in the five years prior to your rollover date. Furthermore, the beneficiary for both accounts must remain the same and no contributions should have been made during that year of rollover.
Can I roll my 529 plan into a Roth IRA for my spouse?
Federal law dictates that education savings plan funds can only be withdrawn for qualified higher education expenses or expenses listed in the tax code. Beginning 2024, however, the SECURE Act permits families to roll unused 529 account funds over into Roth IRAs for their spouses without incurring taxes or penalties.
Families with unused 529 account assets could find this new flexibility particularly valuable. Since the rules remain unclear, it’s wise to consult a financial professional prior to making changes – for instance, we still don’t know whether changing beneficiaries triggers a 15 year holding period or impacts annual Roth IRA contribution limits.
Consider Carol, age 27, who holds a $52,000 balance in her state’s 529 plan and plans on retiring at age 67. Thanks to new legislation, she can now move her unused $529 assets directly into a Roth IRA for Mike without incurring taxes or penalties incurred as a result of conversion.
Can I roll my 529 plan into a Roth IRA for my children?
Before 2024, the only way to repurpose 529 funds that didn’t get used for education was to withdraw them tax-free and fund a Roth IRA with it. But with the Secure Our Retirement Act coming into play in 2024, that changed – now, any unused education savings account assets can be converted to Roth IRA assets for one of your beneficiaries with up to $35,000 being allowed per lifetime total of contributions and earnings plus annual contribution limits of your Roth IRA account.
However, this option is only available if your 529 account has been open for 15 years or longer. Furthermore, it remains unclear if changing beneficiary will restart the five-year holding period, or whether state income taxes or tax benefits (like deducting education expenses) need to be reimbursed; until more guidance is issued it’s wiser to proceed cautiously.
