Can I Roll a 529 Plan Into a Roth IRA?
Starting in 2024, 529 account owners can transfer their funds into a Roth IRA without incurring taxes or penalties as the result of new federal legislation.
Change of Beneficiaries It is unclear if changing beneficiaries triggers a new 15-year “clock”, and/or how state taxes will apply; please consult your wealth advisor or tax professional regarding specific details for your state.
Taxes
New regulations permit you to convert unused 529 funds to Roth IRAs, but specific conditions must be fulfilled first. Your account must have been open for at least 15 years and its rollover must equal five years’ contributions and earnings according to IRS regulations. Furthermore, any distribution from your Roth IRA must only be used for qualified expenses or else it will incur income taxes as well as a 10% penalty fee.
As such, it’s crucial that you prepare in advance and have enough funds saved up for educational expenses. A savings calculator can help you estimate how much to set aside each month; alternatively if you need assistance, contact a CFP(r) professional who can advise on setting up 529 accounts or rolling over funds into Roth accounts as soon as possible.
Eligibility
If the account owner is currently or formerly the beneficiary, they can transfer any unspent 529 assets into a Roth IRA – with a limit of up to $35,000 including earnings – but only once every five years.
Account owners may rollover 529 funds into the IRA of their spouse, sibling, first cousin (and their respective spouses) as an heirloom gift; alternatively they can use any leftover 529 funds for graduate school education costs, future grandchild education costs or for their own retirement purposes.
The new rollover rules may provide some flexibility for those who have money left over from college education expenses, though it remains uncertain whether the 15-year holding period restarts when beneficiaries change or whether state laws mirror federal law on this point. Therefore, it’s advisable to meet with a financial professional in order to identify an optimal strategy for you and your family.
Beneficiary
Beneficiaries of 529 plans are those who will ultimately use the money saved in them to pay for qualified college expenses. While other education-savings options (like Coverdell accounts or ESAs ) have income restrictions, 529 plans allow parents to allocate funds no matter their income levels.
Custodian of a 529 plan typically refers to either parent or grandparent; its beneficiary can then use this money for tuition fees, books and room and board expenses. Individuals cannot simultaneously act as custodian and beneficiary.
Beginning in 2024, Secure Act 2.0 allows you to roll over up to $35,000 of lifetime total from a 529 plan into a Roth IRA for one beneficiary at any one time without incurring tax consequences or penalty fees. There are some restrictions and qualifications, however; such as being at least 24 years old. Furthermore, earning income must equal or surpass that amount rolled over in order to make an tax-free rollover possible.
Rollovers
The IRS rules surrounding 529-to-Roth rollovers can be complicated. Before taking any actions, consult with a wealth advisor or tax professional first as these rollovers include an annual contribution limit ($7,000 in 2024) and lifetime transfer restriction of $35,000 per beneficiary. In addition, contributions cannot be made if your MAGI exceeds either $161,000 for single filers or $240,000 if married filing jointly.
Rolling funds over has several potential advantages. If you have already contributed to a 529 plan in one state and wish to switch beneficiaries now, doing so without incurring federal taxes or penalties is possible, according to Loyd. Furthermore, changing beneficiaries of your 529 account whenever desired without incurring penalties (this applies even if changing family members like spouses, children and grandchildren, siblings first cousins and descendants are involved) without incurring federal taxes on contributions made in previous plans – however it may restart its 15 year clock and lead to recapture taxes being collected in some states if switching is made between states 529 plans!).
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