Withdrawals of 529 funds used for nonqualified expenses will incur income tax and a 10% penalty; however, you are permitted to change the beneficiary of your account without incurring an additional penalty.
Starting in 2024, you can also convert any unused 529 assets to Roth IRAs – though with some restrictions.
Can You Roll It Into a Roth IRA?
A 529 account provides an effective tax-efficient means of saving for college. But these savings could also prove helpful come retirement time! Under a provision in the SECURE 2.0 Act, any unused 529 assets – up to an annual lifetime limit of $35,000 – can now be converted directly into Roth IRAs for beneficiaries without incurring income taxes or incurring the 10% penalty fee.
This new policy, set to come into force in 2024, aims to give parents more options for financing their children’s education as well as strengthening retirement savings accounts. However, there are certain limitations and considerations.
Before investing any funds from a 529 plan into an IRA or Roth IRA, it is wise to consult a financial or tax professional for advice. They can assess your unique circumstances and help determine whether a move makes sense for you.
Can You Roll It Into a Traditional IRA?
Contrary to an IRA, 529 plans are open and accessible to everyone; they’re often established by parents or grandparents on behalf of children or grandchildren – their beneficiaries – as education savings accounts that grow tax-deferred with withdrawals tax-free for qualified educational expenses like tuition, books and room and board expenses. Furthermore, certain states offer state tax deductions on contributions.
However, if you withdraw money from a 529 plan for non-qualifying expenses such as home or medical costs, income taxes and a 10% penalty on earnings may apply as well as any state tax credits or deductions you received when making contributions, according to Farrington.
New legislation set to go into effect next year will make it possible for savers to convert unused 529 funds to Roth IRA assets without incurring taxes or penalties, enabling you to plan their retirement strategy more effectively. It is advised to consult a financial advisor prior to attempting this change as making such a change could significantly alter its outcome.
Can You Roll It Into a 401(k)?
As much as 529 plans can offer tremendous flexibility, there are some drawbacks you should keep in mind. One such drawback is the restriction to one rollover per year which could rob you of some market opportunities as well as delay investment results.
Keep in mind that 529 accounts are typically administered by states. That means your state may offer superior investment options than others, ensuring you get maximum value from your money.
Thirdly, keep in mind that money in a 529 account can only be transferred into a Roth IRA after it has been opened for more than 15 years – this is because these accounts were designed specifically to help savers save for college education costs; if saving is too expensive for you right now, consider alternatives such as 401(k) and 403(b) plans which allow users to put away funds for all sorts of expenses.
Can You Roll It Into a 403(b)?
529 plans differ from retirement savings accounts in that contributions can be made on behalf of beneficiaries (typically children or grandchildren) after taxes have been withheld; earnings generated within these plans grow tax-deferred, and withdrawals used towards qualified education expenses do not incur taxes when used to withdraw the money.
If you use your 529 account for non-education expenses, federal income taxes and a 10% penalty on withdrawal could apply, in addition to losing any state tax deductions or credits claimed when contributing.
Beginning in 2024, anyone with excess funds in a 529 plan that they don’t plan to use can roll them into a Roth IRA without incurring federal income tax or incurring the 10% penalty for non-education withdrawals. While this change is welcome news for anyone left holding funds that they no longer require or can afford to spend, its use remains subject to certain limits, such as annual and lifetime contribution caps, as well as a 15 year holding period.