Can I Roll a 529 Into a Roth IRA?
If the funds from a 529 account are used for nonqualified expenses, their beneficiary could face federal income tax plus an additional 10% penalty.
Starting next year, new rules under the SECURE Act allow 529 plan beneficiaries to rollover their accounts into Roth IRAs. Here’s how it works.
A 529 plan is a tax-advantaged savings account designed to assist families in saving for college education costs. These plans typically offer multiple investment portfolio choices including mutual fund and exchange-traded fund investments, with age-based portfolios that automatically switch into more conservative investments as your beneficiary nears college age.
As with other savings vehicles, 529 plans may present potential drawbacks if your child decides not to attend college as planned or their career changes; income taxes and a 10% penalty could apply on non-qualified withdrawals from their account – although this penalty can be waived according to an Education Data Initiative survey.
Starting next year, you’ll be able to transfer money from a 529 plan into a Roth IRA under certain conditions. According to Carter McClung’s analysis, these new rules require the account be open for 15 years prior to conversion and limit annual conversions according to Roth IRA contribution limits – potentially encouraging families to start saving early for college savings goals.
No Income Limits
As long as the money is used to cover qualified education expenses, withdrawals from a 529 plan may be taken at any time without incurring penalties. If it’s moved into an IRA account or used for other purposes than education expenses then income taxes and an additional 10% federal tax penalty may apply.
Assume, for instance, that Margo’s mother opens a 529 account for her when she turns 10 years old and continues making contributions until she reaches 22. When Margo completes her higher education at 24 and starts working full-time a 529 is still helping to save for future expenses.
Congress passed legislation at the end of 2022 that allows families to convert 529 accounts to Roth IRAs for the first time, without incurring income-based limits on transfers. Margo could move $6,500 into her Roth IRA account without losing its remainder – leaving plenty in her 529 for future education costs.
If a beneficiary withdraws money from a 529 plan and doesn’t use it to pay qualified education expenses, they’ll face a 10% federal income tax penalty. Investment earnings within their 529 account are taxed separately from contributions; as soon as nonqualified expenses occur with these funds they’re subject to additional federal taxes as well.
However, if a family has unutilized money in a 529 account, they can transfer it without incurring penalties to a Roth IRA and ensure their investment earnings can still grow tax-free in preparation for retirement. This option provides parents with children who do not attend college or vocational schools to ensure they still benefit from tax-free growth in retirement earnings.
This was made possible under the SECURE 2.0 bill and its new rule that went into effect in 2024 as part of it. While this allows Roth IRAs, there are restrictions such as income limitations that prevent many high-income savers from taking full advantage of this opportunity.
No Required Minimum Distributions
As with other investment plans, 529s usually include an array of investments such as mutual funds or exchange-traded fund portfolios with differing growth potential or risk profiles; some can be more aggressive while others more conservative. A common feature among 529s is an age-based portfolio which automatically switches towards safer options as the beneficiary approaches college age.
Experts advise knowing how to withdraw from a 529 plan appropriately. If you withdraw too much in any one year, some or all of it could be subject to tax (see Chapter 8 of IRS Publication 970 for more details), while withdraws used on nonqualified expenses will incur an extra 10% penalty tax.
Your withdrawals can be paid to either the account owner (e.g. a parent or grandparent) or to their beneficiary. You can change beneficiaries if your child no longer attends school or gets enough financial aid that they no longer require funds from your plan.
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