Can I Roll Over a 529 Plan Into a Roth IRA?
Consideration must be given before converting a 529 plan into a Roth IRA. Not all states follow federal rules regarding tax penalties when switching states, so make sure yours does.
To qualify for a rollover, funds must have been in their account for 15 years without having been used to cover tuition or other qualified expenses. Furthermore, changing beneficiaries will reset this clock.
What is a 529 plan?
A 529 plan is a tax-advantaged investment account designed to help individuals save for education expenses. Funds in the account grow tax deferred and distributions tax-free when used towards eligible education expenses such as tuition fees, room and board, books etc.
Many states provide tax deductions for contributions made to 529 plans, typically maintained by parents for their children’s future educational costs. Furthermore, account owners have full control of their account and can change beneficiaries at any time.
Families with college-bound grandchildren or other family members can use 529 plans as an invaluable aid. While withdrawals from a grandchild’s 529 account could potentially impede federal financial aid eligibility, new rules introduced under Secure Act 2.0 (passed in 2024) now permit the funds in an unused 529 account to be transferred directly into a Roth IRA without incurring taxes or penalties; provided certain conditions are met. We suggest consulting your wealth advisor about this provision of Secure Act 2.0 before proceeding.
How can I roll my 529 plan into a Roth IRA?
If your child will no longer need the funds in his or her 529 plan for academic expenses, you can roll their account balance into a Roth IRA with some restrictions in mind; any investment earnings withdrawn for non-qualified use are subject to income tax and an additional 10% federal penalty tax.
NerdWallet’s guide to rolling over 529 plans into Roth IRAs provides more details, but here are some general guidelines: the maximum amount you can roll is $35,000 with annual Roth IRA contribution limits in effect; additionally, funds must be transferred trustee-to-trustee from 529 plan to Roth IRA account.
As with other provisions of the new law, additional guidance on this topic is expected. For instance, it remains unclear if changing account beneficiary will restart the 15-year clock; until there is more clarity provided, you may wish to seek professional guidance in this matter.
Is there a penalty for rolling my 529 plan into a Roth IRA?
If you still have funds left over from paying qualifying education expenses, rolling them over into a Roth IRA could help avoid both federal income tax and the 10% penalty on non-qualified withdrawals. Before doing this, however, consult with a wealth advisor as rollovers typically have annual contribution limits set forth for them and any clawback taxes may also apply (state income taxes are an example of such clawback).
Congress recently passed a law to enable you to convert up to $35,000 of a 529 into a Roth IRA starting in 2024, however many details of this new rule remain hazy. For instance, it remains unknown whether you can change beneficiaries before rolling over, as doing so could restart its 15-year holding period. Regardless, this option should be carefully considered by savers as it could help get ahead on retirement savings while giving peace of mind knowing their children have covered professional or vocational training should they ever return to school for professional or vocational training later down the line.
Can I roll my 529 plan into a Roth IRA if I live in a state that doesn’t offer a 529 plan?
A 529 plan can help families save for their child’s college education with tax-deducted contributions and tax-free withdrawals if used for qualified expenses, such as tuition fees, room and board and books. Any withdrawals for other reasons will incur income tax plus an additional 10% penalty on earnings earned in the account.
To avoid paying this penalty, you can change the beneficiary of a 529 account to someone within their immediate family – such as spouse, sibling, parent or child of the original beneficiary.
Alternative Options When Rolling 529s into Roth IRAs This relatively new option requires you to fulfill several key conditions; such as holding onto your 529 account for at least 15 years prior to any rollover attempt and no contributions have been made in the last five years – these requirements must all be fulfilled for this option to work properly.
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