Can I Roll a 529 Plan Into a Roth IRA?
If your student has graduated and no longer plans on returning to school, the beneficiary can be changed. There may be certain restrictions or exceptions.
Under new rules introduced in 2024, 529 accounts may now be converted to Roth accounts after holding for 15 years (including contributions and earnings). This represents an important change to tax law.
What is a 529 plan?
A 529 plan is a tax-advantaged savings account designed to encourage people to save for education costs. Investments grow tax-deferred while distributions made for qualified educational expenses do not incur tax obligations.
But you could use the money for other expenses, like rent or utilities, or invest it in another type of account such as an IRA – though any withdrawal before age 59 1/2 could incur a 10% penalty and taxes.
Starting in 2024, people who possess unutilized 529 funds may roll them over into a Roth IRA for the account beneficiary without incurring tax penalties. There are some restrictions, however: 529 accounts must have been open for at least 15 years prior to making this change; additionally, their Roth IRA must be named in honor of their beneficiary account holder. This move could provide those with leftover 529 assets an opportunity to boost retirement savings faster.
Can I roll my 529 plan into a Roth IRA?
Under the Secure Act 2.0, families are now able to utilize funds left in 529 accounts as an asset in an individual retirement account (Roth IRA) owned by their beneficiary. The transfer must occur through direct (plan-to-plan or trustee-to-trustee) transfers rather than distributions from my529 or any other provider; there may also be some restrictions such as an annual contribution limit on Roth IRA contributions as well as lifetime conversion limits of $35,000 per beneficiary.
Before 2024, anyone withdrawing money from a 529 account that wasn’t used for qualified education expenses was subject to taxes and a 10% penalty on earnings. But now with this new rule in effect, 529 savings may be converted directly into Roth IRAs without incurring those penalties or taxes.
At present, it remains unclear whether changing the beneficiary of a 529 account will trigger a 15 year holding period or incur any penalties under this new regulation. Therefore, account owners and beneficiaries should consult with financial professionals or tax advisors to assess what option best meets their needs.
Can I roll my 529 plan into a traditional IRA?
A 529 plan allows you to save for future educational expenses by setting aside funds now. However, any unused money must be distributed by age 73 (unless it has been converted to an IRA ) otherwise income taxes and penalties will apply.
The SECURE 2.0 Act of 2022 permits 529 account owners to roll over funds without incurring taxes or penalties into a Roth IRA for the same beneficiary, without incurring taxes or penalties. Unfortunately, however, the IRS has yet to address how this will impact its 15-year holding period requirement or whether changing beneficiaries would reset it.
Rollover of an IRA into a Roth IRA requires both earned income and ownership of an existing Roth IRA account in the name of its beneficiary; total contributions limited by annual IRA contribution limit less any contributions already made by this beneficiary, so as not to breach tax law requirements and access 529 plans for higher education expenses. But this new option could boost retirement savings while helping ease higher education expenses more easily.
Can I roll my 529 plan into a SEP IRA?
While 529 plans can be useful in saving for education expenses, they may become cumbersome when your beneficiary does not enroll in college as planned or you have assets left over. That is why Congress enacted the SECURE Act of 2022 allowing beneficiaries to transfer unused 529 funds into Roth IRA accounts instead.
Roth IRA rollovers are exempt from federal income tax and penalties and can go up to the annual contribution limit for 2024 which stands at $7,000. Before proceeding with a Roth IRA rollover, make sure you check with the trustee of that particular Roth IRA first as each trustee may have different rules and regulations that must be met.
Consider that rolling over from a state-sponsored plan may mean losing state tax benefits like financial aid and scholarship funds, and remember that prepaid tuition programs typically have strict distribution rules that prevent their funds from rolling into a Roth IRA; further, many only permit return of principal; making the rollover option for these accounts less appealing than for others 529 accounts.
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