Can a 529 Plan Be Rolled Over?
A 529 plan allows account owners to invest tax-free funds for educational expenses. A student may withdraw funds without penalty should they no longer attend college, or should their beneficiary change.
However, certain restrictions must be considered before investing. This article outlines several strategies that allow unused 529 funds to be rolled over.
What is a rollover?
Rollovers are the process of moving funds from one 529 plan to another, commonly when their beneficiary no longer requires higher education expenses or has reached their goals. When rolling over to a new plan there are certain requirements to fulfill: typically the IRS only permits one tax-free rollover per 12-month period and funds must also be transferred as trustee-to-trustee transfers.
Some 529 plans offer unique tax benefits that are unavailable elsewhere, such as Maryland residents taking advantage of a special state income subtraction for College Investment Plans accounts; this can offset some fees associated with rollover. Also, any rollover from Coverdell Education Savings Accounts requires special documentation regarding both principal and earnings percentages rolled over; any such documentation must include date, amount and breakdown.
Rolling over to a Roth IRA
If a beneficiary of a 529 plan decides not to use their funds for college expenses, they can roll them over into a Roth IRA with some restrictions (annual contribution limits for tax year 2024 are in place). This feature adds great flexibility with 529 plans and gives families who have excess college savings the option of channeling it toward retirement savings instead.
These changes are of immense benefit to families, but it’s essential that families understand how the rules operate. For instance, legislation states that any funds in a 529 account belonging to beneficiaries who have already graduated cannot be transferred over to Roth IRAs due to holding period requirements; as a result it may be best to wait until after graduation before switching your savings into one of those accounts.
Rolling over to another state’s plan
When moving 529 plan funds, there are a few key points to keep in mind. First and foremost is understanding what qualifies as a rollover according to IRS regulations; generally funds may only be moved once every 12 months between 529 programs that qualify as Qualified Tuition Plans (QTP), meaning an eligible college savings or prepay tuition plan where state tax benefits have been received by beneficiaries and to qualify as a rollover under IRS rules, within 60 days from withdrawal date and must go back into QTPs as soon as possible for it to qualify as a rollover under IRS rules.
Rollovers to brokerage accounts or Roth IRAs can also be done indirectly, though it’s important to note that any amount transferred must include both principal and earnings in order to avoid taxes and penalties. Furthermore, indirect transfers into a Roth IRA are only permissible if otherwise ineligible due to income level considerations.
Rolling over to a brokerage account
This year marks a welcome change, offering families flexibility when it comes to rolling over excess 529 funds-up to an annual limit of $35,000-into a Roth IRA without incurring penalties for nonqualified withdrawals and producing any taxable income. This should provide comfort to families that had excess funds left sitting idle after their children graduated or decided against college attendance.
Roth IRA conversion of 529 assets must occur within 15 years from their original contribution to a qualified tuition plan, making this requirement unknowable for beneficiaries transferring between states’ plans or indirect rollover.
To complete a rollover, close your account with your current 529 program and fill out a rollover form from your new plan administrator. Also make sure that any requirements related to Medallion signature guarantees are satisfied before sending in your rollover request.
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